What is NRR?
The Net Revenue Retention (NRR) is the percentage of revenue retained from existing customers at the start of a period after accounting for expansion revenue and churn.
How to Calculate NRR (Step-by-Step)
Net revenue retention (NRR), also known as “net dollar retention (NDR)”, is a crucial key performance indicator (KPI) for SaaS and subscription-based companies.
NRR is of particular importance in the SaaS industry because it is not only a measure of customer retention, but also a company’s ability to maintain high engagement and continuously improve its current offerings to meet (and surpass) the needs of its customers.
The ability to acquire new customers is just one piece of the puzzle, with the other being the long-term retention of those customers, as well as facilitating more expansion revenue.
A consistent stream of recurring revenue from subscription or multi-year contracts is necessary for SaaS companies to sustain current (and future) growth.
With that being said, repeat customers – i.e. long-term customer relationships – are the source of recurring revenue, which is a function of high retention rates, constant engagement, and tangible improvements post-feedback.
NRR Rate: Revenue Churn and Expansion MRR
A track record of predictable revenue makes raising capital from venture capital (VC) or growth equity firms much easier, as the long-term revenue sources reduce the risk of future cash flows, as well as signals the potential for product-market fit.
Technically, NRR could be categorized as a revenue churn metric, since it calculates the percentage of recurring revenue from existing customers that remains over a specified period.
The main use-case of tracking NRR is to gauge how “sticky” a company’s revenue is, which is affected by the product or service’s value proposition and overall customer satisfaction.
In general, a higher NRR suggests a greater customer lifetime value (LTV) and a more optimistic growth outlook for the company.
SaaS KPI Metrics: NRR vs. MRR vs. ARR
The net revenue retention (NRR) metric is lesser-known compared to other more prevalent SaaS KPIs like monthly recurring revenue (MRR) and annual recurring revenue (ARR).
- Monthly Recurring Revenue (MRR): The normalized, predictable revenue on a per-month basis as generated from active accounts on subscription-based payment plans.
- Annual Recurring Revenue (ARR): The estimated predictable revenue generated per year by a SaaS company from customers on either a subscription plan or a multi-year contract, i.e. MRR × 12 Months.
MRR and ARR are both measures of recurring revenue from existing customers, however, the effects of future revenue churn are neglected.
Therefore, NRR takes the MRR/ARR metrics a step further by describing a SaaS company’s recurring revenue fluctuations that are attributable to factors like expansion revenue (e.g. upselling, cross-selling) and churned revenue (e.g. cancellations, downgrades).
Given enough time, a low NRR will catch up to a SaaS company and cause ARR to slow down until the underlying problems are fixed.
By only focusing on a metric like MRR, a company could be ignoring the decline in revenue from their existing customers, i.e. less consumption and more churn, which is due to prioritizing new customer acquisitions over ensuring that existing customers are satisfied.
Since ARR is based on MRR and assumes the most recent month is the most accurate indicator of future performance, it suffers from the implicit assumption that there is no future churn.
ARR cannot be analyzed on its own because a SaaS company’s ARR could be projected to grow 100%+ each year – yet the net dollar retention could be poor (i.e. <75%).
NRR Formula
NRR is equal to the starting MRR plus expansion MRR minus churned MRR – which is then divided by the starting MRR.
Expansion revenue and churned (or contraction) revenue are the two primary factors that impact a company’s recurring revenue.
- Expansion Revenue → Upselling, Cross-Selling, Upgrades, Tier-Based Price Increases
- Churned Revenue → Churn, Cancellations, Non-Renewals, Contraction (Account Downgrades)
NRR is typically expressed as a percentage for purposes of comparability, so the resulting figure must then be multiplied by 100.
Conceptually, the NRR formula can be thought of as dividing the current MRR from existing customers by the MRR from that same customer group in the prior period.