Net Revenue Retention in SaaS: What is it and How to Improve It
What is Net Revenue Retention? And should you care about improving this retention metric?
While getting new customers is important, retaining existing customers is much easier and less costly.
In this article, we’ll take an in-depth look at what Net Revenue Retention is, why it matters and the multiple approaches you can take to improve it.
- Net Revenue Retention (NRR) is a SaaS metric that calculates the percentage of revenue retained from existing customers over a specific period of time.
- NRR helps you understand whether the service provided has the quality of engaging customers and meeting their needs.
- Calculate net revenue retention using this formula: Net Revenue Retention Rate (NRR) = (Starting MRR – Contraction MRR – Churn MRR + Expansion MRR)/ Starting MRR x 100
- NRR rate above 100% is considered a good rate for enterprises, but for small and medium businesses, 90-100% NRR rate is acceptable.
- If a company has to choose between NRR and Gross Revenue Retention (GRR), it should consider factors like company type and business growth rate.
- You can increase the Net Revenue Retention by focusing on driving account expansion or reducing churn.
- Drive account expansion with contextual upgrade modals and in-app messages, and by reminding users of what they are missing out on.
- Reduce churn with in-app self-service support, exit surveys, and by using NPS to proactively reach out to detractors before they churn.
- Use a product growth tool like Userpilot and start improving your NRR with in-app messaging.
What is Net Revenue Retention (NRR)?
Net Revenue Retention (NRR) is a SaaS metric that calculates the percentage of revenue retained from existing customers over a specific period of time (usually monthly or yearly), including upgrades, downgrades, cross-sells, and cancellations.
Net Revenue Retention helps you understand how many existing customers are actually staying loyal and extending their subscriptions.
Let’s take a look at an example to understand clearly what exactly Net Revenue Retention is.
Let’s say a SaaS company has 100 customers. From these 100 customers, 30 churn. To calculate net revenue retention you will need to consider extra income generated by the remaining 70 accounts.
You might’ve also heard about Net Negative Churn Rate and Net Dollar Retention Rate.
Both of these metrics mean the same thing and are often used interchangeably with the net revenue retention rate.
Why is measuring NRR important?
NRR helps you understand whether the service provided has the quality of engaging customers and meeting their needs. If it doesn’t, they will eventually cancel their subscription or downgrade.
NRR is a key metric that can uphold the company’s financial performance.
It also comes in handy while determining customer success quality. It is also a crucial indicator that the business is growing in a healthy and stable way.
NRR can not only gather data about customer retention but also shed light on the expansion and growth aspects of SaaS companies.
How to calculate the Net Revenue Retention Rate?
To calculate the Net Revenue Retention rate, first, add your churn MRR and expansion MRR. Then subtract it from Contraction MRR, and again subtract the result from starting MRR. Divide the result by starting MRR and then multiply it by 100 to get the Net Revenue Retention Rate.
Calculate net revenue retention using this formula:
Net Revenue Retention Rate (NRR) = (Starting MRR – Contraction MRR – Churn MRR + Expansion MRR)/ Starting MRR x 100
These are the metrics that you need to take into account while calculating NRR:
- Monthly Recurring Revenue (MRR): The amount of recurring revenue the company predicts to earn every month.
- Expansion MRR: Used to calculate the amount of additional revenue from upsells, cross-sells, and add-ons from current customers within a month.
- Downgrade MRR: The opposite of Expansion MRR; it is used to calculate the decrease of revenue caused by existing customers within a month.
- Churn MRR: Measures how much revenue is lost due to customer cancellations in a month.
What is a good Net Revenue Retention rate?
If your Net Revenue Retention rate is anything above 100%, it indicates healthy growth for your SaaS business. The bigger the number, the more rapidly your business is growing.
NRR over 100% indicates that the revenue gained from upsells, cross-sells, and add-ons are larger than the revenue lost due to downgrades and churn.
But business size is a factor when you’re looking for a “good NRR”. The benchmark for a good NRR differs for small, medium, and enterprise businesses.
Although an NRR above 100% is a good growth indicator for Enterprise businesses, a 90-100% NRR rate is considered great for small and medium businesses.
What’s the difference between NRR & Gross Revenue Retention (GRR)?
Gross Revenue Retention (GRR) is a SaaS metric that measures annual revenue lost from existing customers.
Although GRR is often confused with NRR, the two retention metrics are not the same.
Like Net Revenue Retention, Gross Revenue Retention is calculated based on MRR, Churn MRR, and Contraction MRR, but it does not include Expansion MRR and tends to decline as the company grows.
SaaS professionals debate over which metric between Net Revenue Retention and Gross Revenue Retention is the most appropriate for measuring customer success.
It might seem convincing to use NRR as it includes more information. But Gross Revenue Retention provides information on the long-term growth of the business.
Here’s the formula to calculate GRR:
Gross Revenue Retention (GRR) = (Monthly Recurring Revenue (MRR) at the start of the month – Churn – Downgrades)/ MRR at the start of the month
How to improve Net Revenue Retention
You need to focus on two key points to improve your NRR:
- increase expansion revenue through upsells, cross-sells, and add-ons
- reduce churn by minimizing downgrades and cancellations
If you look at how the NRR rate is calculated, you will see expansion MRR is the only metric that can provide a positive impact if increased. So this should be your main priority.
Secondly, reduce the churn rate by preventing current customers from canceling their plans or downgrading their services.
In short, to improve Net Revenue Retention, focus on increasing the expansion MRR and decrease the churn so that expansion MRR becomes higher than the revenue lost due to churn for a given period.
3 practical ways of increasing Net Revenue Retention by driving account expansion
Drawing the attention of new customers to use your service is important but keeping your existing customer base is more important and less expensive.
An increase in Expansion MRR will result in increased Net Revenue Retention and less revenue churn.
That being said, there are 3 practical ways you can increase Net Revenue Retention.
1. Encourage users to make an upgrade using modals
If you want users to upgrade a trial account to a paid account, modals can be an effective way to push it.
You can push the upgrade contextually when users want to perform a task that is limited by the free account.
For Calendly, this is adding more than 1 event type.
The free account of Calendy limits user access to one event type. If a user wants to use more than one event type, they will need to upgrade to unlock this feature.
An upgrade is not limited to only free accounts. Users who are already using your plan can be sent messages to upgrade to an expensive plan when their plan does not include all the features that they need.
The best part is that you can do it right in the app using product growth tools to build modals with no-code and trigger them contextually.
2. Drive account expansion with contextual in-app messages
Contextual in-app messaging is another way that can help to increase Net Revenue Retention. Contextual alerts are triggered in the app where needed, to remind users about upgrades.
For example, when a user scrolls to see the message history in Slack and hits the workspace limits, a button shows a message that they have reached the end of 10,000 most recent messages.
It puts the upgrade button in front of the user at the exact moment when they need it.
3. Remind users what they are missing out on prompt upgrades
FOMO can be quite powerful in driving account expansion. Constantly reminding users what they are missing out on and offering an easy way of getting the extra value is a sure way of generating more expansion revenue.
Here’s an example of how SmallPDF uses it to drive upgrades (yes, chances are more users will upgrade after a free trial of a premium account).
They remind users of how many tasks they have left on a specific day and prompt them to try the premium plan that removes the restriction.
This is a great way of ensuring that users know what they’re missing out on by not upgrading.
3 practical ways of improving Net Revenue Retention by reducing churn
It is much cheaper to retain customers than to acquire new ones. Churn is inevitable but if you are customer-centric you will be able to cut it to a minimum. Here are some effective tips to do so.
1. Offer in-app self-service support to boost customer success
Offering in-app self-service support will drive customer success and significantly reduce the number of support tickets as customers mostly find the answers to their questions right in the app.
More than self-service support, using an in-app resource center is a way of offering in-app guidance on request.
Shortening the learning curve and making it easier for your users to experience value and stick around.
For example, your users can easily trigger an interactive walkthrough directly from inside the app, as many times as they need it, simply by clicking on a small widget inside the app.
2. Use NPS to proactively identify customers before they churn
In-app NPS surveys are a great way of understanding which customers are loyal and which are not. On top of that, by using a follow-up qualitative question, you can also uncover the reasons behind it.
Once you have collected and analyzed the data you can proactively contact low Net Promoter Score (NPS) users and try to solve their issues before they churn.
Check out qualitative responses and identify patterns of what’s making users unhappy and use the information to turn detractors into promoters.
Using a tool like Userpilot you can trigger NPS surveys in-app and collect both quantitative and qualitative responses. Then use the tool to analyze it and automate responses based on it.
3. Use churn surveys to uncover why your customers are leaving
It is important to know why your users are leaving so that you can work on those issues in the future.
And churn surveys are a great way of understanding what your product is missing and what is needed to improve.
Use churn surveys to ask customers a simple question (why are they leaving?) when they hit the cancellation button.
Take Asana for example and the simple survey they use.
Use most common reasons why customers churn as a multi-choice list of answers and then automate responses based on them. This will allow you to offer alternatives to churning, increasing the customer retention rate.
When a user clicks on the ” Asana is too expensive” option, they are prompted with a different modal, offering an alternative to canceling based on the user’s stated reason.
If you can’t convince the user to stick around, at least you can begin to understand why users churn and use the insights to improve your product and the user experience.
Net Revenue Retention is a crucial metric and now you have a few ready-to-use tactics for improving it, either by focusing on driving expansion revenue or increasing customer retention.
Want to drive net revenue retention up by implementing some of the tactics we covered in this article? Get a Userpilot Demo and see how easy it can be to get started.