Understanding your business revenue requires more than looking at your bottom line each month. Most businesses should monitor and evaluate a collection of different revenue metrics to understand company performance and predict future growth. The specific metrics that a business chooses to measure will significantly affect their ability to gauge business health and take action on the resulting insights.
Customer retention is consistently a top concern for SaaS businesses – and for good reason. A 5% improvement in customer retention can increase a company's profitability by between 25% and 95%, while the cost of acquiring a new customer is often 5 to 25 times higher than retaining an existing one. In 2021, the SaaS market was estimated to be worth around US$146 billion and it is expected to grow to US$195 billion by 2023. SaaS businesses that identify opportunities to refine their retention strategy have huge potential for growth. This is where net revenue retention (NRR) comes in.
Read on to find out what businesses need to know about what NRR is, how it's calculated and why it's important for SaaS customer retention and growth strategies.
What's in this article?
- What is NRR (net revenue retention)?
- How to calculate net revenue retention
- Net revenue retention vs gross revenue retention
- Net revenue retention benchmarks
- What is a good net revenue retention rate?
- Why net revenue retention is important for SaaS businesses
- Revenue retention with Stripe Billing
What is NRR (net revenue retention)?
Let's start by thinking about the meaning of NRR. Net revenue retention (NRR) is a metric that measures a company's ability to retain revenue from existing customers over a specific period of time. Calculating NRR provides a more comprehensive metric than gross revenue retention (GRR) or customer retention because it is influenced by changes in revenue from upsells, expansions and lost revenue from customer churn.
How to calculate net revenue retention
Beyond knowing the meaning of NRR, it's important to know how to calculate it. To do this, the net revenue retention formula is used, taking the net increase in revenue from a company's existing customers at the end of a specific period of time and dividing it by the beginning-period revenue from those same customers. This gives you the net retention rate. When calculating NRR, changes in recurring revenue from multiple sources are taken into account – new customers, price increases, upsells and expansions – as well as lost revenue from customers that churned or downgraded during the period in question.
To calculate NRR and find your net retention rate, you first need to determine the revenue generated by your existing customers during a specific period, excluding revenue from any new customers acquired during that period. This revenue is referred to as "net recurring revenue". You also need to determine the revenue generated by those same existing customers by the start of the period, which is referred to as "base recurring revenue".
The net revenue retention formula is as follows:
NRR = (Net recurring revenue - Monthly recurring revenue (MRR) lost from churned customers - MRR lost from downgrades + Revenue from upgrades) / (Base recurring revenue) x 100
To give an example for calculating NRR using this net revenue retention formula, let's say that a company had £100,000 in recurring revenue from existing customers at the beginning of January, and £120,000 from those same customers at the end of January. During that time, the company lost £5,000 in MRR due to customer churn and £2,000 in MRR as a result of downgrades. Meanwhile, it earned £8,000 from upgrades (upsells, cross-sells and expansions). Using the formula, the net revenue retention for January can thus be calculated as follows:
NRR = (£120,000 - £5,000 - £2,000 + £8,000) / £100,000 x 100
NRR = £121,000 / £100,000 x 100
NRR = 121%
By using this net revenue retention formula to find your net retention rate, NRR can be calculated on a monthly, quarterly or annual basis, depending on the company's business model and the insights it needs. For example, businesses can calculate NRR for specific markets, customer segments, campaigns or seasons.
Net revenue retention vs gross revenue retention
Now we know what NRR is, its meaning and how to calculate it, let's think about GRR in more detail. NRR and GRR are both metrics that measure a company's revenue growth over time and provide insights into the effectiveness of retention strategies.
However, they are calculated differently and provide different information about the health of a business. The NRR calculation is more comprehensive and includes new revenue from upgrades, such as upsells, cross-sells and expansions, in the net retention rate. However, this type of revenue is excluded when measuring GRR. GRR only takes into account how much revenue was retained or lost from existing customers.
GRR is calculated by taking the total revenue generated by the end of a given period and dividing it by the revenue from those same customers at the start of the period.
The formula for GRR is:
GRR = (Net recurring revenue - MRR lost from churned customers - MRR lost from downgrades) / Base recurring revenue x 100
Unlike NRR, GRR cannot be greater than 100% (even if there is no churn or downgrades) as it doesn't include customer spend on upgrades.
Both metrics have benefits and drawbacks, and both can be actionable. While NRR gives a more complete picture of revenue growth, including upselling and cross-selling efforts, it can sometimes mask a retention problem if the company's efforts to grow revenue among existing customers are especially successful. In that scenario, you could have a high NRR and still be losing customers.
In contrast, GRR highlights retention issues by more clearly indicating lost MRR. GRR is also useful for companies with both recurring and non-recurring revenue models, as it comprehensively shows how successfully the company is retaining its customers and increasing overall revenue over time.
Net revenue retention benchmarks
NRR benchmarks comprise a set of industry standards that companies can use to compare their performance with that of their peers. These benchmarks vary widely across different industries. NRR benchmarks are typically based on data from companies within the same industry or with similar business models, and are used to provide a benchmark for what is considered to be a "good" or "average" NRR.
To get a better understanding of your SaaS company's retention and growth trends over time, compare your current NRR with the company's historical NRR, as well as industry benchmarks.
What is a good net revenue retention rate?
NRR benchmarks vary depending on the industry and the stage of the business, but an NRR above 100% generally indicates healthy levels of customer retention and revenue growth.
Here's a brief overview of what different NRR tiers indicate about a SaaS business:
More than 100%
An NRR rate of over 100% suggests that a business could be retaining most or all of its existing customers and has grown its revenue from upsells and expansions.80–100%
An NRR rate of between 80% and 100% typically means that the business is retaining most of its customers but may not be growing its revenue as much as it could. When businesses see an NRR in this range, they might need to look at their churn rate and customer lifetime value (LTV) to understand whether the sub-par NRR is a result of customer drop-off or a failure to upsell and cross-sell effectively with existing customers.Below 80%
A net retention rate of below 80% is generally considered to be low. It suggests that the company is likely to be struggling to retain customers and may need to focus on improving retention efforts.
Some businesses might have a net retention rate of below 100% and still be considered healthy. If they are in a very high-growth stage where they are acquiring new customers at a faster rate than they are losing existing ones, this can result in an overall increase in revenue.
It's also possible for a company to have a net retention rate of 100% or more, even if it has not retained all existing customers.
Here are a few scenarios where this could happen:
Price increases
If a company increases the price of its product or service, it could see an increase in revenue from existing customers even if it loses some customers. For example, if a company has 10 customers who each pay £100 per month and it raises the price to £120 per month, it could lose 1 customer but still see an overall increase in net revenue retention from the remaining 9 customers.Upselling
If a company is successful in upselling existing customers to higher-priced products or services, it could see an increase in revenue even if it loses some customers. For example, if a company has 10 customers who each pay £100 per month for a basic service, and it upsells 5 of those customers to a premium service that costs £200 per month, it could lose 4 customers who haven't upgraded but still see an overall increase in net revenue retention from the remaining 6 customers.Acquisition of new customers with higher revenue potential
If a company acquires new customers who have a higher revenue potential than the customers it loses, it could see an increase in net revenue retention even if it loses some existing customers. For example, if a company loses 5 customers who each pay £100 per month, but it acquires 2 new customers who each pay £500 per month, it could see an increase in net revenue retention even though it has lost customers.
These scenarios show why it's so important to look at NRR alongside other metrics to get a more complete picture. While a high NRR is almost always a favourable indicator, you could still be experiencing problems with retention. Even if the NRR looks great at the end of a reporting period, it's still helpful to know what specifically is working well and what can be improved.
Why net revenue retention is important for SaaS businesses
Revenue metrics calculated using the net revenue retention formula tell a business where their money is coming from – and where they're losing it. For SaaS businesses, revenue metrics can pinpoint which products and services are succeeding or failing with key market segments, reveal inefficiencies in marketing, sales and user acquisition funnels, and impact budget projections and spending plans.
Here are a few reasons why calculating NRR offers an important revenue metric for SaaS businesses:
It measures the effectiveness of retention efforts
A low NRR indicates that the company could be struggling to retain customers and might need to improve customer engagement and satisfaction.It indicates future growth potential
NRR is often used in conjunction with other metrics, such as churn rate and LTV, to provide a more complete understanding of a company's performance, health and growth prospects.It identifies issues early
NRR offers businesses a view of their revenue performance over time, which can help them to identify issues early on. Subscription-based businesses that identify retention issues early can prevent significant revenue loss in the future.It evaluates the overall business performance
A high NRR indicates that a company is not just successfully retaining customers and growing revenue through upsells and expansions, but delivering an experience and products that their customers love.
Revenue retention with Stripe Billing
Once they've understood NRR, businesses need to translate the insights into action. This is best accomplished using an end-to-end solution for customer revenue management, such as Stripe Billing.
Stripe Billing provides charts that illustrate net revenue retention, broken down by customer cohort. Stripe Billing also tracks other important metrics related to customer payments, upsells, churn and revenue more broadly. This can help high-growth SaaS platforms capture more revenue, launch new products or business models, and accept recurring payments globally.
Stripe Billing also offers features that can help businesses improve their revenue retention:
Flexible billing plans
Stripe Billing allows businesses to create flexible billing plans, including the ability to offer free trials, discounts and prorated charges. This allows businesses to create plans that are tailored to the needs of their customers.Automatic payments
Stripe Billing supports automatic payments, meaning that businesses can bill their customers on a recurring basis without processing payments manually each time. This helps to ensure that customers are billed on time and can reduce billing issues that result in customer churn.Retry logic
For SaaS businesses, payment failure is one of the top reasons for customer churn. Stripe Billing contains built-in retry logic that automatically retries failed payments and notifies businesses of any billing issues. This can help businesses to quickly address any billing problems and minimise lost revenue due to payment failures.Customer management
Stripe Billing enables businesses to view and manage all of their customer information in one dashboard. This includes information such as the billing address, subscription plan and payment history. This Dashboard can help businesses identify and address any billing issues quickly.
Stripe Billing provides businesses with tools to easily manage their recurring revenue and subscriptions, while automating the billing process, which can improve revenue retention by reducing billing issues that can lead to customer churn. To learn more, start here.