What is Net Revenue Retention Rate?
Net Revenue Retention (NRR) Rate is the percentage of recurring revenue retained from existing customers in a defined time period, including expansion revenue, downgrades, and cancels. This churn metric gives a comprehensive view of positive as well as negative changes with respect to customer retention.
How to calculate Net Revenue Retention Rate
ƒ Sum(RR (recurring revenue) at the beginning of the period + expansion RR during the period - downgraded RR during the period - cancelled RR during the period) / (RR at the beginning of the period)
ƒ Sum(renewing customers RR) / Sum(RR of customers due to renew)
What is a good Net Revenue Retention Rate benchmark?
In a SaaS business, a Net Revenue Retention Rate >100% is a growth indicator. Across all SaaS companies, the median Net Retention Rate is ~100%. Higher Annual Contract Value (ACV) products have a higher Net Retention Rates. For SaaS companies selling into small and medium businesses (SMBs), a good Net Retention Rate is 90%. For Enterprise SaaS, 125% is considered a good Net Retention Rate.
Example A: A company has 100 customers, each paying $2,000 per month. MRR at the beginning of the month is $200,000. Within the month, 1 customer adds a $4,000 MRR upgrade, 2 downgrade by $500 each, and 1 customer cancels.
NRR = = ($200,000 + $4,000 - ($500 x 2) - $2,000) / $200,000 = $201,000 / $200,000 = 100.5% expressed monthly
Example B: A company has 100 customers paying $20,000 for annual subscriptions. Within a one month period, 10 customers are due for renewal, only 9 actually renew, 1 adds a $5000 ARR upgrade, and 2 downgrade their subscription by $2000 each.
NRR = ($20,000 x 9) + $5,000 - ($2,000 x 2)) / ($2,000 MRR x 10) = $19,000 / $20,000 = 95.0% expressed monthly
More about this metric
Retaining customers is key for operating a healthy and profitable business. A high Net Retention Rate is an indication that your offering represents a strong value proposition for your customers. Net Retention Rate is an indication of how well a company can not only renew, but generate additional revenue from its customers following an initial sale, in what’s often referred to as a “land and expand” strategy. Net Retention Rate is also an important component of profitability. Acquiring a new customer can be 5 - 25 times more costly than retaining an existing customer. By keeping and expanding your existing customers, you reduce your Customer Acquisition Cost (CAC), therefore increasing your profitability.
A high company growth rate and high Net Retention Rate are correlated according to SaaS Capital research. Gainsight has also found that mature Customer Success practices are correlated with a higher Net Revenue Retention Rate.
For a comprehensive understanding of retention, it’s important to track both the percentage of all customers who renew or cancel contracts, measured by logo churn, and the percentage of all revenue dollars under contract which renew.
Metrics related to Net Revenue Retention Rate