What is Net Revenue Retention and How Do You Calculate It?

In a world where products and services can be easily commoditized, businesses are looking for new ways to achieve sustainable growth and stay in the race.

Alongside mounting pressure and disruption from new players, the immediate approach is to take on competitors at their own game — and actively drive customer acquisition.

While businesses obsess with customer acquisition and spend all their time and resources to go after new customers, they tend to overlook a potential competitive advantage that they already have — their existing customer base.

Customer acquisition is important. Having said that, you will spend less and make more by retaining your current customers. If we look at the numbers, an improvement of just 5% in customer retention rate can increase revenue by 25% to 95%.

In this article, we break down one of the most commonly used metrics to track revenue stability from existing customers — Net Revenue Retention (NRR).

What is net revenue retention?

Net revenue retention, or Net Dollar Retention (NDR), measures the revenue that you have retained and generated from your current customer base over a given period of time (either monthly or annually).

While NRR includes expansion revenue and growth potential from existing customers, it doesn’t take into account any net new customer acquisitions or net new sales.

NRR also considers how much you have lost from cancellations or downgrades to help you assess the business growth potential of your existing customer base. Consequently, NRR has come to be a gold standard for subscription-based SaaS companies, where revenue is not typically based on one-off purchases but includes the costs of recurring subscriptions, upgrades, downgrades, and customer churn. 

No company can have zero churn. But when we’re through with this article, you will have enough information to refine your retention strategy and improve your net revenue retention rates.

TL;DR

• NRR measures the revenue growth from existing customers over a specific span of time.
• For SaaS companies, NRR should be the yardstick to measure success, as it helps you determine key metrics like repeat purchases and the share of wallets of current customers.
• Calculating NRR will help you understand the revenue earned from current customers on cross-sells and upgrades against the churn rate, which includes downgrades, subscription cancellations, and expirations.
• The key difference between NRR and GRR is that, unlike NRR, GRR measures the revenue retained from the current customer base without accounting for cross-sells or upsells.
• From helping you assess the overall financial health of your business to understanding the effectiveness of your retention strategies and identifying issues leading to churn — there are many reasons why it’s important to track NRR.
• Tips to improve the NRR include — building an effective customer success plan, improving customer support services, identifying opportunities to increase cross-sells and upsells, reducing downgrades, and preventing churn.

What is the purpose of NRR?

One of the key purposes of NRR is that it helps you understand how sustainable the revenue growth of your business is. It is an essential customer success KPI that captures how the recurring revenue or value of your existing customer base is growing or shrinking over time by factoring in both churn and expansion revenue.

What does this mean?

NRR takes into account:

• How many customers are churning
• And how you can earn more revenue from current customers through cross-sells and upsells

NRR tells you how well you are able to retain revenue streams despite downgrades and cancellations.

Example of net revenue retention 

Let’s say a leading SaaS company, ACME Ltd., offers its clients a project management tool. Customers pay a monthly or annual subscription fee based on the number of features or users that they sign up for. ACME is suddenly experiencing a decline in customer retention owing to a new competitor on the block and a lack of advanced features.

By measuring net revenue retention, ACME can better understand customer retention problems. Moreover, they can prioritize augmenting the most-used features or adding advanced capabilities to reduce churn and improve overall customer satisfaction.

You can arrive at NRR by measuring:

• Recurring revenue from ACME’s customers
• Expansion revenue from upgrades to a new or improved service or purchases of an additional feature
• Revenue lost from downgrades to a lower-tier plan 
• Revenue lost from cancellations

How do you calculate net revenue retention?

By calculating net revenue retention, you will be able to measure the increase in revenue from a company’s current customers at the end of a specific period.

To calculate NRR, you need to have the following details in place:

• Starting Monthly Recurring Revenue (MRR): The recurring revenue that you are earning from your customers in a given month.

• Expansion MRR: The additional revenue generated from cross-sells and upsells to customers in that particular month.

• Contraction or downgrade MRR: The drop in revenue in a month owing to downgrades.

• Churn MRR: The revenue lost from customer cancellations in a month.

Now to calculate NRR, you need to deduct the lost revenue (this includes downgrades and churn) from the total revenue (your starting MRR plus any expansion revenue earned in that month) and divide it by your starting MRR.

While NRR is expressed in monetary terms, to convert the figure into a comparable percentage — you need to multiply it by 100.

Using all this information, the Net Revenue Retention Rate (NRRR) formula is:

Starting MRR + Expansion MRR - Contraction MRR - Churn MRR / Starting MRR X 100

We will understand this better with an example.

Let’s go back to the example of ACME Ltd. and calculate the company’s MRR for June 2024.

The company starts the month with $100,000 in MRR. In June, customers opted for add-ons like video conferencing features, while a few requested additional training services. As such, the company was able to generate $50,000 in expansion revenue from cross-sells and upsells. Some customers also opted for a lower-tier plan, and as such, ACME lost $3,000 in revenue in June. Additionally, the company experienced a churn rate of 2% and lost another $2,000 in monthly revenue. 

To break it down, this is the data that we have:

Starting MRR: $100,000

Expansion MRR (due to add-ons and additional services): $50,000

Downgrades: $3,000

Churn rate: 2% (2x100,000/100) = $2,000

Now, let’s apply the net revenue retention rate formula to this scenario:

([100,000 + 50,000 - 3,000 - 2,000] / 100,000) x 100 = 145%

The NRR rate for ACME in June 2024 is 145%.

NRR vs. GRR: What’s the difference between net revenue retention and gross revenue retention?

One key distinction between net revenue retention and Gross Revenue Retention (GRR) is that NRR gauges retention by considering expansion revenue, whereas GRR does not take into account the growth rate of existing customer revenue.

This means that GRR is a more conservative metric as it only calculates the recurring revenue retained from customers over a specific period of time without accounting for expansion revenue from cross-sells or upsells.

Why is it important to measure net revenue retention?

It is important to measure NRR, as it is a great indicator of the long-term viability of your business and its future revenue potential.

The net revenue retention metric showcases how your existing customers value your offerings. Apart from helping you assess the business's revenue health, NRR also helps you spot churn issues early on and measure the effectiveness of your retention efforts.

A strong NRR reflects an existing base of satisfied customers who:

• Trust your product or service
• Are willing to stay with your company for the long term
• And are likely to upgrade or make new purchases

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On the downside, a low NRR indicates:

• Retention issues
• Areas for improvements in product offerings or customer support
• The need to fine-tune customer experience and engagement strategies

According to McKinsey, nearly 80% of the total revenue growth achieved by the most successful companies globally is from their core business — primarily by unlocking new revenue streams from existing customers (either by selling them new products or more premium products).

Reports also reveal that your chances of making a sale with an existing customer lie anywhere between 60% and 70%. However, selling to a new customer is a lot harder, with chances slimming down to fall between 5% and 20%.

As a result, NRR is a critical benchmark for SaaS leaders and investors alike to understand whether a business has retained enough customers to survive and succeed in the long run.

Strategies to increase your net revenue retention

If you’re looking for strategies to hike your NRR rate, we suggest investing in customer success, improving your customer support service, identifying expansion opportunities, limiting downgrades, and finding ways to prevent customer churn.

1. Build an effective customer success strategy

Customers today expect more from their interactions with SaaS products. This makes it vital for you to bolster your customer success efforts. Your customer success team owns a big part of the revenue pie — which means you need to find ways to incentivize them for customer renewals, expansions, or referrals.

2. Improve your customer support service

Unsatisfied customers are more likely to churn. You need to have a reliable and dedicated customer support team that can proactively diagnose and fix issues and speed up resolution times.

3. Spot opportunities to increase expansion revenue through cross-sells and upsells

It’s important to find ways to offer additional products and services, as well as increase the usage thresholds of your SaaS customers.

• What are your customers’ most loved features? 
• Are there ways you can improve them?
• Can you enhance pricing or packaging that can nudge customers to spend more?

It’s recommended to add upsell triggers to your product. You can do this by reminding them of what they are missing out on by not upgrading to premium features. 

4. Limiting downgrades

Offering discounts for long-term commitments or highlighting to your customers the value that you are providing them are ideal ways to prevent downgrades. Additionally, you can be flexible with pricing or consider reconfiguring your pricing plans to avoid customers downgrading to a lower-tier plan.

5. Preventing churn

Customers may churn for many reasons. It’s important to first understand why customers are leaving. Once you determine this, you can invest in areas that will have the most impact, like iterating with different pricing models, improving the UX/UI, or adding new features to existing plans.

Streamline revenue recognition with Zenskar

A high NRR rate demonstrates effective revenue strategies and can even attract investment interest and better valuations.

In this article, we go deeper into how usage-based pricing is a trusted way to hit a high NRR rate.

“If you want to achieve higher NRR rates, usage-based pricing (UBP) is simply not negotiable. Period.”

To be able to manage and recognize customer revenue, you need an advanced billing solution like Zenskar. 

With Zenskar as the single source of truth for your revenue, you can accurately recognize net revenue retention, access real-time analytics, and get actionable insights into all your growth levers to boost your sales.

Get a first-hand experience of the tool today — book a demo here.

Frequently Asked Questions (FAQs)

1. How do you calculate net revenue retention?

Net revenue retention is calculated to measure the growth or decline in revenue from existing customers. NRR is calculated using the below formula:

Starting MRR + Expansion MRR - Contraction MRR - Churn MRR / Starting MRR X 100

2. What is a good net revenue retention rate?

A good net revenue retention rate is anywhere above 100%.

While benchmark retention rates vary across industries, small to medium-sized businesses should aim to reach a net revenue retention rate above 100%, while for enterprises, the goal should be to achieve an NRR over 130%.

3. What is the NRR benchmark for B2B SaaS?

For B2B SaaS, the NRR benchmark of the most successful companies is well over 120%. Having said that, for a new SaaS company, an NRR between 90% and 100% is acceptable. 

SaaStr shared a few examples of leading SaaS companies with impressive net revenue retention rates:

• Snowflake: 169%
• Twilio: 155%
• Datadog: 146%
• Asana: 130%