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Net Revenue Retention 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 Net Revenue Retention Rate
Subscription based businesses need sustainable growth today. This means that they need to retain existing customers and focus on growing these accounts. Metrics like Monthly Recurring Revenue (MRR) can help to a certain extent, but can also paint an inaccurate picture if your acquisition rates are high. Net Revenue Retention helps you understand what’s going on with your churn and account growth.
SaaS companies aspiring to enter hyper-growth or looking to extend the window need to calculate, track, and monitor their Net Revenue Retention 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
Net Revenue Retention is not to be confused with Gross Revenue Retention, also known as GRR. The latter calculates all customer recurring revenue, excluding upsells and expansion income (unlike NRR). What this essentially means is that GRR helps track customer health by determining how much revenue is lost in total over a period of time, most commonly on an annual basis.
Unlike Net Revenue Retention Revenue rates, the GRR cannot go above 100%. Enterprise-level businesses should strive to get their GRR levels to over 70%. Anything less means that you are not growing fast enough. That said, Gross Revenue Retention is less of an actionable metric when it comes to smaller businesses, SaaS companies, or organizations that are in the hyper-growth stage.
Before getting started with your Net Revenue Retention 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.
You can now start your NRR calculation as per the formula shown below:
Looking to calculate your annual Net Retention 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.
Related: Customer Success KPIs: What You Need to Track in 2022
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 Retention Rate of 90% can be seen as encouraging and positive.
Just for reference, SnowFlake had a Net Revenue Retention Rate of 158% in 2021. Twilio wasn’t far behind with a NRR of 155% and Elastic put up a handsome 142%.
Related: Navigating Success with the North Star Metric
As mentioned earlier, true industry unicorns have NRR rates hovering around the 150% mark. But the rule of thumb approach says that you should have a Net Revenue Retention Rate of above 100%. Anything below that should be a major red flag and you should be conducting a comprehensive churn analysis to rectify the situation, along with a thorough post-sales (especially CS) cycle revamp.
Besides the obvious operational and financial implications of having a healthy NRR, investors are now also looking at this metric to make their decisions. A business that’s not dependent on sales and acquisition is now seen as a promising one.
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:
Boost Your Net Revenue Retention Rate (NRR) Now
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