Net Revenue Rate (NRR) has become the new customer success benchmark in the SaaS space. This Customer Success KPI is helping online businesses measure and track their growth, while also pointing at negative changes as they occur. Let’s take a closer look at NRR SaaS and understand why you need to measure it constantly.
SaaS: The Business Challenges
SaaS businesses, especially customer success executives, are facing many challenges today due to the dynamic nature of things. As mentioned earlier, this unpredictability is limiting the validity of traditional customer success KPIs.
Here are just a few of the biggest challenges:
1. SaaS Customers are Picky. Are Mine Loyal?
If SaaS companies are afraid of something, it’s churn. Many variables that can contribute to customer frustration today – cumbersome onboarding, in-app friction, lack of support, and a poor user experience, just to name a few. There’s also the matter of increased competition. Customers are simply not loyal anymore and will leave as soon as they get frustrated or see a better offer elsewhere.
But how can SaaS businesses know more about their current churn performance and growth progress? There’s a need for an accurate and proactive measurement of where things stand on the retention and growth fronts. Enter NRR SaaS.
2. Retaining is More Profitable Than Acquisition. But How?
The old business model was based primarily on acquisition. But the SaaS market is more about retaining customers and nurturing accounts to promote expansion or upselling. Traditional KPIs are not able to assist with this business goal as they are more reactive in nature. NRR SaaS is helping measure retention and expansion performance. It’s directly tied to customer sentiment and satisfaction.
Here are just a few statistics that show how crucial retention is today:
- It costs 7x to acquire a new customer when compared to retaining an old one
- Loyal existing customers spend almost 70% more than new ones
- SaaS companies get over 60% of business from their existing customers
What is NRR in SaaS?
The Net Revenue Rate metric is helping measure the performance of SaaS businesses. It’s helping customer success teams track negative and positive revenue fluctuations within pre-defined time periods. By calculating the total recurring revenue from current customers with NRR SaaS, it’s now possible to follow key upselling, cross-selling, downgrading, and churn trends.
With the SaaS distribution model constantly changing and customers having multiple options in the market, reducing churn and improving engagement is becoming increasingly challenging for customer success executives and CSMs. This is because traditional measurements splits company revenue into specific parameters, things like new deals (the holy grail), renewals, upsells, and cross-sales. There’s no bird’s eye view.
NRR SaaS helps businesses feel the pulse when one or the following things happen:
- When customers churn or leave your business altogether
- When customers downgrade to free versions or lower-paying plans
- When customers sign up for paid plans or buy a new product
- When customers upgrade to a costlier subscription plans
- When customers add more users to make account bigger
The NRR is now becoming a crucial CS metric that SaaS businesses looking to achieve hyper-growth or become SMBs need to track and monitor closely. Even a 10% NRR difference between two SaaS startups can predict a different future for them – one can sink into mediocrity, while the other can experience exponential growth with a loyal customer base with dozens of brand advocates.
NRR SaaS Real Life Example
You’ll need to calculate a few values to determine your current Net Revenue Rate. These are a blend of some traditional KPIs with key indicators that should paint a complete picture of your current growth trajectory.
Here are the NRR SaaS components:
- Monthly Revenue Rate (MRR) – This is calculated by multiplying the number of monthly subscribers by the Average Revenue per User (ARPU).
- Expansion Revenue (ER) – ER is basically the total sum of all revenue received from upsells and cross-sells, both key SaaS growth channels.
- Contraction Revenue (CR) – CR determines how much your existing accounts have shrunk – reduced active users, downgrades, and less feature usage.
- Lost Revenue via Churn (LR) – You’ll also need to know how much revenue has been lost by closed accounts or lost customers.
NRR SaaS can then be calculated by using the following formula:
NRR SaaS = (MRR + ER – CR – LR) / MRR
For example, let’s assume your SaaS business had a Monthly Revenue Rate of 27,000 USD at the start of June 2022 and finished the month with a MRR of 35,000 USD, along with 5,000 USD in revenue churn. Hence, your NRR SaaS is 111%.
So what NRR should you be going for?
There’s no clear answer to this question. Your company size, growth stage, specific target audience, and other factors need to be considered. Big enterprise-level SaaS companies should aim for three-digit figures of above 130%. These numbers are obviously unrealistic when we are looking at startups and SMBs. In these cases, a NRR of 90% can be a good customer health indicator.
Let’s take a look at some SaaS success stories you can draw inspiration from today. SnowFlake reported an impressive NRR of 158% in 2021. Communication tool vendor Twilio was close behind with a NRR of 155%. Elastic finished 2021 with 142%.
Boost NRR SaaS with Staircase AI
Executive Business Reviews (EBRs) and fine tuning Ideal Customer Profiles (ICPs) can help SaaS companies optimize their CS playbooks and elevate their NRR, but they simply cannot help with the human side of things. Human insights are crucial to elevate NRR SaaS because they help break down sentiment fluctuations and also clear up relationship dynamics with ongoing analysis.
More and more SaaS businesses are understanding the need to feel the pulse, identify sentiment trends, and respond as soon as possible to minimize churn. NRR will flag sudden drops and fluctuations, but you also need to identify key topics that are either problematic to prevent churn or can be leveraged to create new growth opportunities. Also, customer feedback loops need to be nurtured and prioritized.
How can all this be achieved to create a positive NRR trajectory?
Staircase AI is a Customer Relationship Intelligence platform that leverages AI to analyze millions of customer interactions and turns them into actionable insights that are impossible to spot with the naked eye. It’s now possible to uncover customers’ health, journey events, and at-risk accounts. Cutting through the noise is allowing more and more SaaS businesses to reduce churn and improve their NRR.
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