Net Revenue Retention
Net revenue retention (NRR) has become a leading metric for SaaS companies to first determine how successful they are, and then grow that success to new levels. Think of your revenue from subscribers like water that goes into a bucket. Inevitably as you carry the bucket over time, water may splash out over the top. But what if there are holes in the bucket you don’t know about? You will arrive at your destination with less water than you need, maybe not even enough to go around.
In this analogy, the water you lose is customer churn. To some extent, it’s inevitable that you will lose the water that doesn’t fit in the bucket, i.e. the customers who are not a good fit for your solution. But you could also patch those holes to keep water in the bucket! And, you will ideally be adding water to the bucket faster than you lose it along the way, leading overall to retention of water in the bucket through new customers and upsells.
Why is it more important to think of this as increasing retention versus preventing churn? What do you learn from NRR that is different from other metrics? And the best question of all, what do you do to improve NRR? In this guide, Planhat unpacks this concept from its basic definition to the cross-department strategies that can help you grow NRR.
Net Revenue Retention Definition
Net revenue retention is a calculation of total revenue (including expansions) you earned during a certain period, minus any cancellations, downgrades, or contract expirations that happened in the same time frame. If you’re wondering about the difference between net revenue retention vs net dollar retention, they are actually the same concept. Net dollar retention is a term commonly used in the United States, while globally the term is more likely to be net revenue retention. Or you might even be familiar with it as “cash retention.”
Regardless of what it is called in your reporting, net revenue retention is a metric which should be tracked by every SaaS company at all stages of maturity. NRR gives an actionable look at your current financials and what you can do to improve them. For those new to this idea, it is valuable to compare net revenue retention to other metrics to show why NRR is so essential to measure. Let’s run down the list.
Net Retention Rate vs Churn Rate
Net retention rate is the number of customers you have retained, while churn rate is the number of accounts you have lost. Remember, water in the bucket versus water that has left the bucket. Customer churn is also an important metric for SaaS companies, but over-focus on this metric can lead to the wrong mindset, especially for customer success.
Focusing on customer churn means focusing on users who were maybe not an ideal fit. Focusing on retention empowers you to hone in on the users who do like your product. This lets you take a proactive approach to growth, learning what keeps customers happy and finding more customers like them. By examining churn, you only focus on what causes losses, which may or may not be within your control. It is important to investigate the causes of churn, but with the goal to seek out opportunities to improve retention.
Net Revenue Retention vs Annual Revenue Retention (NRR vs ARR)
The distinction between NRR and ARR is simply one of scope. Annual revenue retention is a metric which captures how much business was retained throughout the year. Net revenue retention can be calculated over much shorter terms, most commonly as monthly revenue retention (MRR) or quarterly revenue retention (QRR). Focusing on shorter-term NRR lets you identify risks to annual revenue retention earlier and take steps to address them. This way, at the end of the year there are no surprises, just celebration!
Net Revenue Retention vs Gross Revenue Retention
Does net revenue retention include new customers? No. It does include your new business from existing customers, while gross revenue retention (GRR) does not. In fact, in some circles GRR is said to stand for Gross Renewal Rate, because this metric only represents existing revenue from existing customers. GRR calculation does not include any upsells or upgrades, even when they are purchased by long-time users.
Why use one over the other? GRR is a metric that can reveal how well your current customers are staying happy with the product over time. NRR shows how much revenue is growing through adding value for new and existing users. Both are very useful metrics, especially when considered in comparison to one another! If GRR and NRR are very similar, there may be opportunities for customer success to expand or upsell within the current book of business. If NRR is significantly larger than GRR, this means lots of new users and upsells have been achieved.
Net Expansion Rate vs Net Retention Rate
While your net revenue retention rate includes both new business from customers and their renewal revenue, your net expansion rate is more focused. Your net expansion rate is a measure of how your existing book of business has expanded through add-ons, upselling, and cross-selling. This could be over the last month, quarter, or even as an additional metric to unpack what is driving your annual recurring revenue.
Does this seem like a lot of metrics to track and distinguish between? One major benefit of net revenue retention (or net dollar retention, for SaaS companies in the US) is that it encompasses many of the metrics above. NRR includes gross revenue you’ve held onto since the last report, plus expansion among your existing customers who have grown more satisfied with the software. Then, you subtract the churn that has occurred at the same time. This reveals how well your existing customer base is sustaining the revenue stream.
NRR is the key metric for SaaS companies to understand their financial strength with a perspective that enables a proactive approach to grow revenue. When you know your net revenue retention for the last month or quarter, you also understand what streams are contributing most to your growth and which may be lagging behind. This insight is because of the way NRR is calculated–our next topic.
Net Revenue Retention Formula
Calculating your net revenue retention is simple, but you will need a few different pieces of information.
ARR, MRR, or QRR: The recurring revenue total that you started with.
Revenue From Upsells: The recurring revenue total from growth of existing customers through add-ons and upsells.
Revenue Losses: The total revenue lost from contract expirations or cancellations during the period in question.
With all these in hand, you can calculate net revenue retention as an amount or percentage of revenue.
To calculate NRR as an amount, complete the following equation:
Revenue total (MRR or QRR) + Upsells - Losses
You will add the new revenue to your existing revenue, and subtract what was lost during the same period. For instance, imagine you started the month with $75,000 in revenue, and your customer success team upsold existing clients for $15,000. At the same time, another account worth $7,000 did not renew their contract. Your NRR calculation would look like this:
$75,000 + $15,000 - $7,000 = $83,000
Going into the next month, your NRR is $83,000.
Sometimes, and especially for investors and shareholders, it is more helpful to represent the percentage by which your NRR has grown from the previous period. In that case, you complete the same equation. Then, add a final step, dividing your new total by the old one:
Revenue total (MRR or QRR) + Upsells - Losses / Revenue total (MRR or QRR)
So using our previous calculations, you would divide $83,000 / $75,000, giving you an NRR of 111% compared to the previous month.
Depending on what you want to learn, you can carry out the same calculation by quarters or semi-annually to see how your revenue has grown. Whether your upsells or expansions are driving the growth, you can then make better strategic decisions to shore up areas which are lagging or invest more in those which are leading.
What is NRR in Customer Success?
We’ve talked a lot about how NRR is calculated and what you can learn from NRR compared to other metrics. But what does NRR mean for customer success teams? A strong NRR means you’re successfully building relationships with customers, helping them adopt your product and driving them to renew. This is why NRR is such a natural metric to both measure and enable the efficiency of SaaS customer success teams.
Long-term insight into NRR lets a customer success team understand which accounts are likely to expand in value over time, and then chase that value by engaging with and upselling those accounts. Yes, we believe customer success is more of a sales position than a technical support role. This is what we mean at Planhat when we talk about an offensive vs defensive approach to customer success. With the right information, you can take the opportunity to your best customers, instead of worrying about retaining the ones which are unlikely to grow in value.
That’s not to say high customer churn is something to ignore, just that it’s something to study and understand, which is why we have created a platform to help. If you have high churn, but your best accounts are still increasing in value, then your net revenue retention is still going up–and you’re also creating better brand advocates among your ideal users.
What is a Good NRR for SaaS?
Generally, any NRR higher than 100% is a win. However, of course you want to know more! SaaS is a diverse industry, home to startups, unicorns, and household names. For each segment of the market, what counts as a good NRR is slightly different.
For instance, a small or mid-sized SaaS company often considers an NRR between 90-100% to be acceptable, especially as the product is being fine-tuned. Before your market fit is snug and tailored, you will likely experience slightly higher rates of customer churn, which is why a lower percentage is okay. As long as you are gathering user feedback on the positives and negatives, use this period as motivation to pinpoint what is needed to achieve 100% or greater NRR. With NRR over 100%, you have a sign your business will keep growing even if you do not acquire new customers.
But is that guaranteed growth without new user acquisition possible for every SaaS product? Honestly, maybe not. Some established SaaS companies experience widely different NRR among different user bases. For instance, when Squarespace filed to go public, their NRR was only 85%. But because of low customer acquisition cost and different tiers of service, the platform is still growing and strong. With 70% of customers on annual subscriptions and 30% on monthly subscription, Squarespace also sees its NRR fluctuate seasonally, with higher numbers in Q1 and Q3 than other quarters. This is just one example of how tracking NRR helps a SaaS platform understand its business and win with its customers.
We hope it is also reassuring if your own NRR is below 100%! While that doesn’t mean you shouldn’t take action, it’s also not the beginning of the end. That might just be the nature of your user base. But without tracking NRR, you won’t have the perspective you need to judge the situation appropriately and focus efforts in the right direction.
Net Revenue Retention Benchmarks
Benchmarking your revenue retention against the competition helps you identify if you are leading or lagging in your market. But not all comparisons will be equal. In its 2022 Saas Retention Benchmark Report, SaaS Capital recommended benchmarking your NRR based on your average contract value (ACV). This is recommended because your sales, implementation, and onboarding cycles are likely to be a similar length to others with a similar ACV. Take a look at the report to see how larger ACV naturally leads to higher NRR, with deep breakdowns of average company growth rate based on NRR.
The report found that companies with an average contract value of $50k-$250k had the highest net revenue retention in 2022, 106%. If your NRR is at or above this average, you are doing great! Remember that anything above 100% is a win, especially for startups with an ACV of $25k or less.
More KPIs Related to Net Revenue Retention
Customer Health Score: Customer health score is a measure of how satisfied users are with the product, based on how often they use it, which features they use, and whether they choose to upgrade over time.
Planhat helps customer success teams monitor each account’s activity, and you can even automate responses to certain triggers. If a user is continuously accessing one feature, you could have an email queued to provide a resource about an upgrade. Or, if someone hasn’t logged in for a while, the automation can take care of the initial outreach to set up a check-in.
Customer Acquisition Cost: Customer acquisition cost is the amount spent to convert a lead into a customer. When this is high, it does have a significant impact on your NRR, because the expenses mean less revenue overall. However, this might also signify a very high second-year and ongoing return on subscribers who renew and upgrade without the same acquisition costs.
One of the strengths of Planhat is aggregation of data across departmental silos, helping marketing target the best customers, helping sales hand off accounts to success at the right time, and allowing customer success to see a full picture of each account’s health at any time to identify churn warnings in advance. This lets you improve NRR even with a high customer acquisition cost.
Customer Lifetime Value: Customer lifetime value is the total worth of a customer to a SaaS company over the lifetime of the relationship. Increasing customer lifetime value is the work of both customer success and sales combined. A mature customer success team is empowered to add value for customers through upsells and contract expansions, versus less mature teams where customer success is in a tactical response position defending against customer issues.
Planhat is a turnkey solution to connect information from sales, marketing, and customer success to show where opportunities to grow customer lifetime value are going unrealized, and enable action at the point in the customer journey where it makes the most impact.
Logo Retention and Logos Added: Lastly, one KPI which can reflect the successes in NRR is logo retention and new logos added. In this case, we mean the logos of your customers, like you might display on your homepage or other areas of your website.
If you have done a good job of retaining customers, this metric will stay steady, while growing your number of customers means lots of new logos! Then again, if you experience high churn and accept that’s a hallmark of your market sector, this may not be the KPI to pay attention to, except for among your highest-value accounts. However many logos you have, Planhat helps you keep the customers behind them happy!
How Can SaaS Companies Improve Net Revenue Retention?
Improving NRR is a cross-department effort, and it’s a difficult one at that. What makes it even harder is when approaches are not data-driven. Is the problem within the product itself? The onboarding process? Or does it start with the marketing messaging and sales offers that aren’t sustained throughout the customer journey? You could try to lift everything at once, but that’s a heavy lift indeed, and the employees/departments who are high performing might resent the effort more than it is celebrated.
Planhat has built our success helping SaaS companies delight their customers and grow NRR through actionable understanding born from their own data. Here are some of the strategies we’ve built into our platform as core features, as well as a summary of the dark side which emerges when these strategies are not prioritized at the right time in the right department.
What Does Revenue Retention Mean? Satisfied Customers!
Get Noticed: This is a strategy which begins with the marketing department targeting the right customers on the right channels. You need to understand who your best customers are, what they are looking for, and where you can find them. Without this insight, you may have a lot of leads coming in, but few will be highly-qualified, meaning a lot of effort driving a lot of customer churn.
Stand Out: Marketing continues to lay the foundation for NRR growth through messaging about what makes your product different from the competition. What pain points are you solving better than anyone else? This strategy must also integrate the sales team, making sure they understand how the best customers are using the product and what value they are gaining. This translates to better sales pitches and more closed deals.
Deliver Value Fast: A clean handoff from sales to customer success requires excellent onboarding. Your customers need to be shown the transformative value of the product from the first meeting onward. This is much easier with a defined onboarding process and a central platform where all the communication both between departments and with the customer happens smoothly. (Hint hint, that’s us!)
Add Value Over Time: Once the initial value of the product is established, the company needs a way to recognize when and how users are adopting the platform. Then, this adoption can be nurtured and encouraged to deliver a custom experience to the user while also growing their loyalty to the product. On the other hand, when customers are dissatisfied or not engaging with the product, customer success and sales can work together to re-engage and identify the barriers between the customer and the platform.
Avoid Problems: If only this was as easy to do as it is to say! It’s true that inevitably some customers are going to have more issues than others. But you can still grow NRR by identifying problems which are brewing and taking action to address them before they become a critical source of churn. One customer support manager can take the lead, or depending on the issue, the entire team can work together. The important thing is having your finger on the pulse of the data so this strategy even has a chance to manifest itself. Otherwise, your team will always be in a reactive position, caught unaware by problems every time they get an angry email or support ticket.
Succeed Together: This is less of a strategy and more of a mindset–improving NRR is everyone’s job. Each employee, from product to marketing to customer success, must understand how their actions contribute to NRR and what they can do to deliver better results. A unified view of customer concerns, tickets and their resolutions, and even conversations is the first step to including everyone in the effort–and in the celebration when your NRR improves.
Ultimately, if you are retaining revenue it means you are making customers happy with your product. But there is never a point at which you should settle for your current performance as “good enough!” Your customers will always be developing new goals, and there will always be competitors entering the market trying to win their attention. Planhat is a customer platform that helps you get closer to your customers through more targeted and timely outreach with the right message, from the right person, at the right time. We help you grow NRR by keeping the customer and their needs at the center of every interaction between your employees and with the customer themselves.
Want to see how we do it? In part this shows up in our own company journey and the experience we provide to our customers. Planhat was recently named a 5x G2 Leader in virtually every key function of our platform. These awards are given based on user reviews, and we are so thankful for our users who took the time to share their experiences and help us be recognized. We also celebrate our team who works so hard to achieve this mission for our users.
Customer Data Platform: We help our customers consolidate and integrate customer data into one database.
Client Onboarding Software: We help our customers manage post-sales activities: in this category, we got a Users Love Us Badge!
Customer Success Software: We got 15 badges in the Customer Success category, from Easiest Setup to Highest User Adoption and Easiest Admin.
Client Portal: Our Portal is a space uniquely created for collaboration with clients, another feature which won us a Users Love Us Badge!
Customer Revenue Optimization: Customer revenue optimization is a special core of our mission at Planhat, so being recognized as a Leader and that Users Love Us really confirmed we are on the right track.
See the customer reviews which got us this amazing recognition and learn more about these pillars of our product.
Or, are you ready to start talking about how Planhat could work for you and your customers? Contact us today to schedule a demo!