Also known as Net Dollar Retention (NDR) in some scenarios, Net Retention Rate (NRR) has become the new benchmark metric for Customer Success today. What is it all about, how is it calculated, and why is it so important to keep track of it to achieve sustainable business growth? Let’s take a closer look at things.
What is Net Revenue Rate (NRR)?
Net Revenue Rate (NRR) is essentially a metric that helps Customer Success Managers (CSMs) get a bird-eye view of positive and negative revenue changes in a pre-defined time period. This is achieved by calculating the total percentage of recurring revenue from current customers, including factors like upsells, downgrades, and the thing SaaS businesses dread the most – churn.
The following scenarios can impact your NRR:
- Customers leaving you entirely
- Customers upgrading or downgrading their subscriptions (tiers)
- Customers stopping the use of a few of your features
- Customers buying additional features or services
- Customer removing or adding active users (with relevant pricing models)
SaaS companies aspiring to enter hyper-growth or looking to extend the window need to calculate, track, and monitor their Net Revenue Rate very closely. Just a 20% NRR difference between two companies can mean that the higher scoring one will be in a totally different place in a couple of years when it comes to exponential growth, putting less stress on Sales teams, and staying ahead of the competition.
How to Calculate NRR?
Before getting started with your Net Revenue Rate calculation, you need to calculate a few KPIs. These are some traditional metrics that will eventually blend together to give you your current monthly or annual NRR.
- Monthly Revenue Rate (MRR) – Multiply the number of your monthly subscribers by the Average Revenue per User (ARPU). The Monthly Revenue Rate is also a good metric to track in a vacuum.
- Expansion Revenue (ER) – ER is the next ingredient to go into the Net Revenue Rate formula. This is basically the total sum of all revenue received from upsells and cross-sells, both key growth channels today.
- Contraction Revenue (CR) – As the name suggests, you will also need to know how much your existing accounts have shrunk. Shrinkage examples include downgrades, reduced active users, and lower feature usage.
- Lost Revenue via Churn – Losing customers and closed accounts are the worst thing that can happen to CSMs and SaaS companies in general. You’ll need to know how much revenue has been lost to calculate your NRR.
You can now start your NRR calculation as per the formula shown below:
Looking to calculate your annual Net Retention Rate? The formula stays the same. Just replace the MRR with your Annual Revenue Rate, also known as ARR. Also, make sure you are excluding all new deals from your calculations.
NRR Example and Industry Benchmarks
Let’s start things off with an example.
Assuming your business started March 2022 with a Monthly Revenue Rate of 27,000 USD and ended it with a MRR of 35,000 USD following some successful upselling, but you also had 5,000 USD in revenue churn. Your NRR will be 111%.
So what NRR should you be aiming for?
The answer can vary based on your specific industry, the company size, and what audience you are targeting. For example, enterprise-level SaaS companies should definitely be looking at three-digit figures of 130% and above. Things change when we look at businesses that are targeting SMBs and startups, where even a Net Revenue Rate of 90% can be seen as encouraging and positive.
Just for reference, SnowFlake had a Net Retention Rate of 158% in 2021. Twilio wasn’t far behind with a NRR of 155% and Elastic put up a handsome 142%.
Net Revenue Rate Best Practices
It’s common knowledge that the modern Customer Success Manager needs to minimize churn, establish a healthy relationship with the product manager, and also be in sync with the development teams. But there’s more to it than that.
Here are some proven and tested ways to boost your NRR:
- In-App Communications – Besides the obvious chatbots and in-app messaging, CSMs should also implement Modals. Modals are pop-up overlays that highlight important CTAs at crucial touchpoints. A well-planned in-app communication strategy, implemented with the help of the product team, can help customers reach coveted “aha moments” faster.
- Executive Business Reviews (EBRs) – Customers like businesses that care and give them attention. That’s why CSMs should reach out more, feel the pulse, and showcase customer wins to elevate satisfaction levels. Many CSMs are now reaching out with direct renewal questions a few months before D-Day to understand the customer’s sentiment and act accordingly.
- Create an Ideal Customer Profile (ICP) – The SaaS space is becoming increasingly dynamic, with a plethora of use cases and requirements. You may be onboarding healthy amounts of customers, but that doesn’t always mean that they’ll stick. Low NRRs can be a good reason to realign with the Sales and Marketing managers. Creating accurate ICPs is very important.
Net Revenue Rate FAQs
- Your NRR is above 100%? What does it mean?
Your upselling and cross-selling revenue is higher than your churn revenue loss.
- What else can I do about churn?
Churn surveys are a great way to understand why you are losing business.
Strengthen Your Relationships to Boost Your Net Revenue Rate (NRR)