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Read TL;DR
- NRR is a critical metric for SaaS businesses. It reflects the percentage of recurring revenue a SaaS company retains from its existing customer base over a specified period of time. Click here to see how it is calculated.
- By understanding NRR, you can gauge the future revenue potential of your existing customers, plan financial strategies and assess a company's growth.
- While NRR accounts for expansion, contraction, and churn among existing customers, GRR includes account churn and contraction but excludes expansion revenue.
- An NRR of 116% over a 12-month period means if your customer cohort from a year ago were paying you $100, they’re now paying you $116. Your company will grow its revenue by 16% without having to acquire any new customers.
- A good NRR number to target depends on a mix of factors including company stage, segment, pricing model and customer acquisition model (refer to the benchmarks section).
- Curious to learn how you can use SaaS metrics to model your revenue? Download this free eBook.
Acquiring new customers is at least five times more expensive for SaaS companies than retaining customers. Retaining your existing customer base (by limiting churn and downgrades) and getting a bigger share of their wallet (via expansion and upgrades) is the best way to minimize customer acquisition costs. Net Revenue Retention (NRR), also referred to as Net Dollar Retention (NDR), plays a critical role in this regard.
So what is Net Revenue Retention? Net Revenue Retention or NRR is the percentage of recurring revenue a SaaS company retains from its existing customers over a specified time period. It excludes new customer recurring revenue.
NRR is a key cohort-based metric that measures how well a SaaS company retains its customer base and generates additional revenue from it over time, which can be a good indicator of its sustainability and scalability.
This article shows how to calculate NRR with examples and benchmarks, and explains why SaaS companies should monitor this metric along with challenges that arise when analyzing NRR.
Table of Contents
Why is net revenue retention important for SaaS companies?
As a key cohort-based SaaS metric, the net retention rate gives critical insights into the growth potential of your existing customers. It reflects your core business health by indicating the rate at which your business would grow if you didn’t add new customers going forward. Let’s understand the reasons in detail below.
NRR signifies growth and impacts it exponentially
If your company’s net retention rate is above 100%, then you can rest assured that the business is growing. Its revenues are compounding on an annual basis, which makes it attractive to investors.
A high NRR implies a company retains and expands its customer base on a net basis efficiently, boosting LTVs, and this compounds its growth. Companies with low NRR must expend significant resources replacing churn, thus losing ground to competitors that retain existing customers well.
High NRR can take the pressure off sales
When a company’s NRR is above 100%, the business doesn’t need to worry as much about making new sales to compensate for churn. It can rest assured that its revenue from existing customers is compounding over time. A high NRR indicates your company does not have to rely on customer acquisition as the sole growth strategy.
High NRR leads to high valuations
The retention rate matters to investors because it indicates your company’s ability to retain and expand contracts along with helping you figure out where you’ll land by the end of the year. A high NRR rate is an excellent indicator of a company’s customer success and generally means that the company is doing a good job of controlling its customer acquisition costs (CAC). If your company is growing quickly and valued on growth, NRR offers investors a quick way to value it.
Benchmarkit’s Ray Rike has in the past highlighted the high R-squared correlation between NRR and revenue metrics such as enterprise valuation, revenue growth and Rule of 40. This indicates NRR has been a powerful predictor of a company’s valuation.
"NRR is relatively easier to compute compared to LTV and churn rate, making it a tougher metric to manipulate. This gives investors more confidence when using NRR as a means to valuation"- Kirk Kappelhoff, Director of Strategic Finance, Drivetrain.
Learn more about SaaS metrics here
How to calculate net revenue retention?
Here are three simple steps to calculate net revenue retention:
- Calculate the annual recurring revenue (ARR) of a customer cohort during a previous period (typically, 12 months ago).
- Calculate the current ARR of that cohort.
- Divide the result of the second step by the first. Multiply that number by 100 to express your NRR as a percentage.
Here is the Net Revenue Retention formula:
For a detailed step-by-step process for calculating and plotting NRR with examples, check out the below article:
When you’re learning how to calculate Net Revenue Retention, it’s important to understand the various terms in the formula:
- ARR = The total amount of recurring revenue in a year
- Expansion ARR = Revenue from subscription upgrades via upsells and cross-sells by existing customers
- Contraction ARR = Loss of revenue from subscription downgrades
- Churn ARR= Loss of revenue from subscription cancellations
Let’s walk through an example:
What is a good net revenue retention rate?
The higher your NRR, the better. For instance, an NRR of 116% means you’re growing by 16% even if you did not acquire a single new customer. If one of your customer cohorts from a year ago were paying you $100, they’re now paying you $116.
Having said that, what are the benchmarks for NRR? There are many great industry reports out there and we would refer you to the following ones.
While these benchmarks will help you place your performance in context, note that NRR depends on a few factors:
- The maturity stage of your company: Mature companies tend to experience higher retention rates and expansion rates.
- Segment: SMB customers are less inclined to sign long contracts compared to mid-market and enterprise customers and churn more, thereby decreasing your NRR.
- Pricing model: A usage-based model will likely result in more expansion, leading to higher NRR.
- Customer acquisition model / Go-to-market or Sales motion: Generally, freemium / product-led growth (PLG) models tend to see higher NRR rates.
1. Battery Ventures State of OpenCloud Report published in November 2023 is great for early-stage startups with NRR benchmarks based on company ARR range.
2. OpenView Partners’ 2023 SaaS Benchmarks Report listed NRR benchmarks based on company ARR range.
3. Benchmarkit’s 2024 B2B SaaS Performance Metrics Benchmark Report offers an interactive way to get NRR benchmarks based on a variety of factors including annual revenue range, average contract value (ACV), go-to-market motion, pricing model and more.
What is the difference between gross and net revenue retention (GRR versus NRR)?
Gross revenue retention (GRR) includes account churn but excludes expansion revenue while NRR includes both. As a result, the maximum value GRR can have is 100%. It shows how well your company retains its customers over a given time period – if all of your customers from the year-ago cohort renew their contracts today (assuming they’re on annual contracts with no cancellations or downgrades), your GRR will be 100%.
On the other hand, NRR accounts for expansion and so can be over 100%. NRR indicates your company’s ability to both retain customers and expand contracts.
Here is the formula for Gross Revenue Retention:
Is measuring NRR or GRR better?
The answer is, neither retention rate is better than the other. In reality, GRR and NRR simply track different things. If you want to know whether your company is keeping its customers happy with its products and customer service, then GRR is a good choice because it measures how much revenue you’re losing to customers leaving and downgrading their subscriptions (churn and contraction).
On the other hand, if you’re looking to understand more holistically what’s happening with your customer base, then NRR is the best metric to use because it takes into account not only the negative impact of churn and contraction, but also the positive impacts of price increases, upsells and cross-sells.
So, both retention rate metrics provide insights into your business. The choice of which metric to use really just depends on what you want to know.
What is the difference between net revenue retention and annual recurring revenue (NRR vs. ARR)?
ARR is the recurring revenue a SaaS company earns annually while NRR measures how well the company retains its customer base and expands revenue from it. Despite sounding similar, they’re completely different.
NRR, GRR, and ARR are all metrics commonly used to conduct KPI-based SaaS financial planning.
Challenges in calculating net revenue retention rate
Although it’s a good idea for all SaaS companies to monitor their net revenue retention rate, doing so can be difficult. Calculating NRR can be time-consuming and tedious if done manually. It’s understanding the story behind the NRR number that often proves more challenging—especially analyzing by various customer cohorts.
Also, remember that the net revenue retention rate is only one metric of many. You need to look at several metrics to determine what’s really going on with your business. There are relational interplays between the various numbers and it’s up to you to tease out exactly what’s happening.
When working with NRR and other interrelated metrics, Excel-based planning doesn’t cut it for SaaS companies because:
- Manual data entry takes a lot of time and invariably leads to errors.
- Spreadsheets require manual updates and as a result, quickly become outdated.
- Spreadsheets aren’t conducive to collaboration.
- Aggregating data from multiple sources and other spreadsheets is time-consuming.
This process can be simplified dramatically with an FP&A platform that can serve as a centralized location for all of this information, in addition to automating data sourcing and giving finance professionals the power to build whatever models they need.
How Drivetrain simplifies net revenue retention analysis?
Drivetrain’s financial planning and analysis software automates data gathering/uploading so your Finance team can focus on financial modeling, monitoring progress, and making adjustments to stay on target instead.
Some of the benefits that Drivetrain offers:
- Automate calculation of financial ratios & business metrics including runway, bookings, CAC payback, retention, or any custom metric—in seconds.
- Seamlessly marry accounting data with CRM, HRIS, Billing or any other data source—in minutes.
- Speed up your budget and forecast versus actuals (variance analysis).
- Powerful, collaborative multidimensional financial modeling.
- A self-serve interface to build board-ready reports.
FAQs
A key SaaS metric, Net Revenue Retention (NRR) is the percentage of recurring revenue retained from existing customers over a defined period of time.
No, NRR excludes new customer revenue.
It is important for SaaS businesses to track NRR because it indicates growth potential, stability, and overall company health.
Unlike NRR, GRR excludes expansion revenue (which caps it at 100%). On the other hand, NRR accounts for expansion and so can be over 100%.
100% is the minimum NRR you must aim for if you’re seeking investment and growth. Typically, NRR increases with your company’s maturity stage. The following factors play a role in determining your NRR:
- Segment focus – SMB customers are less inclined to sign long contracts compared to enterprises and churn more, thereby decreasing your NRR.
- Pricing model – A usage-based model will likely result in more expansion, leading to higher NRR.
- Sales motion – Freemium and land-and-expand models tend to have higher NRR rates
OpenView Partners’ 2023 SaaS Benchmarks Report lists NRR benchmarks based on company ARR and funding stages.
