Retaining customers in a SaaS business is one of the most valuable strategies. This not only helps lower the customer acquisition cost but also strengthens customers' trust in your brand.
However, how much can a high net revenue retention (NRR) rate help your business grow by keeping more customers engaged?
SaaS businesses that actively invest in improving their retention strategies are well-positioned for growth and profitability. This article highlights the influence of net revenue retention, its impacts on business success, and how to calculate it for your SaaS operation.
What is Net Revenue Retention (NRR)?
Net Revenue Retention (NRR) is the leading metric that allows companies to calculate the percentage of revenue retained from the present customer base over a period of time. This cost includes additional buy-ins like upgrades, downgrades, cancellations, and cross-sells.
Why is NRR Important in SaaS Pricing Strategy?
Net revenue retention (also called net dollar retention) is important for assessing customer satisfaction. Basically, it helps in understanding whether your customers are happy with the SaaS pricing strategy of your product. Attracting new customers requires much more funds than retaining them. Hence, it is necessary to consider the Customer Acquisition Cost (CAC) of the company. This can highly impact customer retention in the long run.
Net revenue retention (NRR) does not only account for an increase in funds but also the changes in it from cancellations or downgrades. Since it also considers lost revenue from customer churns, it is a better metric to calculate compared to Gross Revenue Retention (GRR) for revenue retention.
Let’s check the comparison between Net Revenue Retention (NRR) and Gross Revenue Retention (GRR) to get better business insights.
Net Revenue Retention (NRR) vs Gross Revenue Retention (GRR)
Let us take a look at the table below to understand the differences between the two.
Factors | Net Revenue Retention (NRR) | Gross Revenue Retention (GRR) |
|---|---|---|
Purpose | Accounts for the overall growth of the company over time, which includes upgrades and expansions. | Calculates retention by showing only the revenue lost or retained from existing customers. |
Includes Expansion Revenue | Includes expansion revenue (e.g., upsells, cross-sells, and add-ons). | Excludes expansion revenue; only accounts for revenue retained without upsells or cross-sells. |
Can Exceed 100% | NRR can exceed 100% if the revenue exceeds that of churn rates and downgrades. | GRR cannot exceed 100% even with 0 churn rates and downgrades. |
Primary Insight | Provides complete knowledge about revenue growth and customer expansion efficiency. | GRR outlines only customer retention and loss. |
Usefulness for Recurring Models | NRR can be utilized for recurring revenue models that have upsell potential. | GRR can be utilized for both recurring and non-recurring models. |
We have discussed below about the formula and steps for calculating net revenue retention. Let us see how to calculate the gross revenue retention (GRR).
How to Calculate Net Revenue Retention (NRR)?
Calculating net revenue retention is rather simple.
Follow these three steps to calculate NRR:
Step 1: Find the Last MRR: Calculate the Monthly Recurring Revenue (MRR) for a specific group of customers (a cohort) from a month ago.
Step 2: Check Month’s MRR for the Same Group: See how much revenue that same group of customers generates now, including any upgrades, downgrades, or customers who left.
Step 3: Calculate the NRR Percentage: Divide the current MRR by last month’s MRR, then multiply by 100 to get the NRR as a percentage.
Hence, the next time you need to figure out the net revenue retention rate of your company, this equation can come in handy.
What is a Good Net Revenue Retention Rate?
A good Net Revenue Retention (NRR) rate is typically considered 100% or higher, with financially strong SaaS companies, which are often seen achieving rates above 100%. Furthermore, the Enterprise SaaS, 125% is considered an excellent NRR, signifying a strong capacity for growth and efficient resource allocation.
Generally, across SaaS and subscription-based companies, an NRR of 100% or more indicates solid financial health, while companies with an NRR below 100% may face challenges requiring downsizing or cost-cutting measures.
Implications of High vs. Low NRR
Understanding the implications of Net Revenue Retention (NRR) can help companies gauge their financial health and customer satisfaction. Here are the following implications of high vs. low NRR:
NRR > 100% – This implies more recurring revenue from the existing customers, leading to expansion.
NRR < 100% – This implies less recurring revenue from churn and downgrades leading to contraction.
Most SaaS companies aim to maintain an NRR above 100% to achieve predictable growth. A minority of high-performing companies, however, can reach 120% NRR or more, producing exceptional expansion.
Build Your Business Through Best Revenue Retention Strategies
Capitalize high-quality strategies that help in increasing your net revenue retention.
Why is Net Revenue Retention Important in SaaS Businesses?
Net revenue retention (NRR) is one of the most important SaaS metrics for a company. It helps track how much revenue your company retains over time from existing customers, factoring in upsells, cross-sells, downgrades, and churn.
How much money did your organization retain by upselling and cross-selling a customer? NRR is the solution to questions like these.
Key reasons why NRR is important:
1. Measures retention success: Helps measure how well the company is retaining customers. A low NRR definitely shows problems with customer satisfaction and highlights a need for better engagement or service improvements.
2. Predicts future growth: NRR, used alongside other metrics like churn rate (how many customers leave) and Lifetime Value (LTV), provides a clear picture of growth potential.
3. Spots issues early: By tracking NRR over time, companies can observe warning signs of retention problems early on. Identifying these issues early helps SaaS businesses make quick changes to prevent revenue losses.
4. Evaluate overall business health: A high NRR indicates a strong, stable business that is effectively retaining and growing revenue through upsells, cross-sells, and expansions. It’s also a sign that customers are happy with the product.
How can the Net Revenue Retention Rate in SaaS be Increased?
Companies are always on the lookout for how to elevate revenue through their marketing efforts.
Let us take a look at a few strategies that help in increasing the net revenue retention of companies if implemented correctly.
1. Improve customer experience with in-app support
It is impossible to stay up 24/7 as customer support. Hence, organizations make self-service support available. This stops users from leaving your app, browsing your website, scrolling to find the support button, and analyzing the needed documents available on it.
A built-in help center with tutorials, videos, and a knowledge base allows customers to find answers on their own, without waiting on customer support. Additionally, it also saves your support team from answering iterative questions.
As a result, your customers will be happy and satisfied through this approach contributing to the net revenue retention.
2. Drive upsells better with contextual in-app messages
Account expansion can help in driving net revenue retention. One of the best methods to drive revenue is through contextual in-app messaging. These messages alert users about a certain service they are enjoying to inform them to upgrade their plans to keep experiencing these features.
A good instance of this is the storage alert for Google Drive. Once the user’s account storage ranges between 80-100%, they are notified with an alert message stating to either make space in their existing plan or upgrade to a better one. By offering timely, suitable suggestions, you encourage customers to increase spending without feeling pressured.
3. Ensure customer success through personalized onboarding
One of the best ways to engage and onboard customers is by customizing segments on the signup page. It makes them feel welcomed and supported which increases their chances of staying. Begin with a welcome survey to learn better about the new customers onboard.
Another tactic is to segment your audience based on their goals and requirements to offer a seamless onboarding experience for your product/service.
4. Identify customers with NPS before they dropoff
If you want to measure customer loyalty, Net Promoter Score (NPS) is the best way to do it. Along the customer journey, you can use NPS at major touchpoints to identify the customers that are about to churn.
NPS dashboards display the score, respondents across different segments, and trends across time. These touchpoints help in analyzing customer sentiment and assessing the revenue churn potential.
The detractors (who score less than 7) can be contacted to analyze their issues and offer solutions to reduce the churn rate. It also tracks the product usage for each user. Utilize this data to segment them based on their activity. As a result, this helps in spotting the segment that is problematic.
Once you identify the segment, you can follow it up with the right in-app support. This step is the most important one since a lot of users cancel their subscription if they find your product complex to use.
5. Utilize churn surveys to unravel the cause of customer churn
As discussed above, churned customers can be quite helpful as well when it comes to gathering information. It is necessary to understand why your customers are leaving to tackle the problems they face through your product. This ensures the reliability of your service in the future.
Asking churn users questions regarding the issues they faced while they were using the app is a resourceful manner of gathering customer feedback.
Struggling To Determine The Gaps In Your Strategies?
Calculate your NRR effectively to find the gaps in your sales campaign and improve them.
Amplify Your Efforts Better with a Net Retention Rate
Identifying your company’s net revenue retention helps in understanding the basic needs of your audience for your product/service. You get a general idea of how your business is doing financially through net revenue retention.
As discussed above, it is easy to calculate net revenue retention by just putting the values in the formula. LabsMedia helps calculate these metrics along with the right SaaS KPIs to assess your company's financial condition.
Knowing the right SaaS metrics is everything that a business owner requires to understand the areas of improvement and the touchpoints to change. Make sure to monitor these touchpoints frequently to guarantee the well-being of your business.
FAQs
What is the difference between MRR and ARR?
The difference between MRR and ARR is that MRR is the predictable monthly revenue that your business earns from its customers. ARR is the estimated annual recurring revenue that your business earns from every client annually. Hence, ARR provides long-term insights into your company, while MRR offers short-term operational insights.
How much revenue retention is good for SaaS businesses?
The net revenue retention for SaaS businesses varies from company to company, however, an NRR of 100% is favorable for the majority of SaaS companies. An NRR above 120% is considered excellent in SaaS businesses, whereas small to mid-sized businesses must aim for at least 100% An NRR above 100% indicates that your product/service experiences more upsells and cross-sells compared to customer churn and downgrades.
What are the net revenue retention benchmarks?
The net revenue retention benchmarks vary across different industries. There are a bunch of industry standards and references set by companies to monitor their performance against their competitors. They comprise typically data from companies in the same industry or within the same business models. They are also considered to be the reference of a good NRR that a company must have.
What strategies help increase the net revenue retention for SaaS companies?
Some strategies that help increase the net revenue retention for SaaS companies include enhancing customer support by offering regular check-ins to prevent the churn rate from elevating. Upselling and cross-selling additional products can be a great add-on to increase revenue retention. Improving your products regularly based on customer feedback can also enhance the value of it. Lastly, a tiered and flexible pricing model can save a lot of users a lot of money resulting in their retention.
