Net Revenue Retention (NRR) Explained: Meaning, Formula & Calculation

Maximizing revenue growth and profitability relies not only on acquiring new customers but also on retaining and expanding relationships with existing ones. One key metric that encapsulates the combined impact of customer retention, expansion, and churn is the Net Revenue Retention (NRR). This article explores the significance of tracking NRR in SaaS businesses, provides examples, and discusses strategies to improve this critical metric.

What Is Net Revenue Retention (NRR)?

Net Revenue Retention (NRR) is a key SaaS metric that measures how much recurring revenue a company retains over time, including expansion revenue but excluding new customer acquisition. A high NRR indicates strong customer retention and revenue growth from existing users.

NRR meaning

NRR assesses a company's ability to maintain and grow revenue from its existing customer base. It considers upsells, cross-sells, downgrades, and churn to provide a comprehensive view of revenue retention performance.

Net Revenue Retention rate (NRR) is a metric used to measure the overall growth in Monthly Recurring Revenue (MRR) from  existing customers over a specific period, taking into account upgrades, cross-sells, and downsell, as well as customers cancelling their contract also known as churn. NRR provides insights into the effectiveness of a SaaS company's efforts in retaining and expanding its customer base, and is a great measure for Customer Expansion Revenue, which is important to track and understand when working on maximizing Sales Efficiency.

Calculating NRR

To calculate NRR accurately, follow these steps:

1. Determine starting MRR or ARR – Use the revenue from existing customers at the start of the period.

2. Add expansion revenue – Include upsells, cross-sells, and upgrades.

3. Subtract contraction revenue – Deduct revenue lost from downgrades.

4. Subtract churned revenue – Account for lost revenue from canceled subscriptions.

5. Apply the NRR formula – Convert the final value into a percentage.

Net Revenue Retention Formula

NRR is calculated using the following formula:

NRR = [(Starting MRR + Expansion MRR - Contraction MRR - Churned MRR) ÷ Starting MRR] × 100

For example, if a company starts with $100,000 MRR, gains $20,000 from expansions, loses $5,000 due to downgrades, and $10,000 from churn, the NRR is:

NRR = [($100,000 + $20,000 - $5,000 - $10,000) ÷ $100,000] × 100 = 105%

A net revenue retention rate above 100% means the company is expanding revenue within its existing customer base despite churn.

Net Dollar Retention vs. Net Revenue Retention

Net Dollar Retention (NDR) is another term for NRR, often used interchangeably in SaaS and subscription businesses. Both measure the same concept: how much revenue is retained from existing customers.

Net retention vs gross retention

By monitoring GRR alongside NRR, businesses can gain a comprehensive understanding of their retention dynamics and identify areas where customer retention strategies may need improvement. So when should you use NRR over gross revenue retention? Before we can answer that, we need to define gross revenue retention.

• Net Retention (NRR) considers expansion revenue, making it a growth-focused metric.

• Gross Retention (GRR) focuses purely on churn, showing how well a company retains customers before expansion revenue is factored in.

Goss revenue retention

Gross Revenue Retention (GRR) is another vital metric for SaaS businesses, focusing solely on the revenue retained from existing customers without accounting for any upsells or cross-sells. It provides a clear picture of how well a company is maintaining its current revenue base by measuring the percentage of recurring revenue retained from existing customers over a specific period, excluding any expansion revenue.

GRR is particularly useful for identifying churn and understanding the stability of the core customer base. A high GRR indicates strong customer loyalty and satisfaction, as it reflects the ability to retain customers without relying on additional sales efforts.

Gross Revenue Retention (GRR) vs. Net Revenue Retention (NRR)

• NRR includes expansion revenue and reflects growth within the existing customer base.

• GRR measures retention but excludes expansion revenue, focusing only on customer churn and downgrades.

Gross Revenue Retention Formula:

GRR = [(Starting MRR - Churned MRR - Contraction MRR) ÷ Starting MRR] × 100

Since GRR does not account for upsells or cross-sells, it is always lower than or equal to NRR. A strong GRR (close to 100%) indicates high customer satisfaction and minimal churn.

Understanding the distinction between Gross Revenue Retention (GRR) and Net Revenue Retention (NRR) is crucial for SaaS businesses aiming to optimize their revenue strategies. While GRR focuses on the ability to retain existing revenue without considering upsells or cross-sells, NRR provides a broader perspective by including these additional revenue streams.

Essentially, GRR offers insights into customer loyalty and the stability of the current revenue base, highlighting areas where churn might be an issue. In contrast, NRR reflects the overall growth potential by showcasing how effectively a company can expand its revenue from existing customers. By analyzing both metrics, businesses can identify strengths and weaknesses in their customer retention and expansion efforts, allowing for more targeted strategies to enhance both customer satisfaction and revenue growth

NRR vs. GRR: Key Differences

NRR is more commonly used in SaaS and subscription-based businesses because it reflects the true expansion potential of an existing customer base.

Why Is Net Revenue Retention Important?

• Predicts long-term growth – High NRR indicates sustainable revenue expansion.

• Signals product-market fit – A strong NRR suggests customers find ongoing value in the product.

• Influences company valuation – Investors and stakeholders use NRR as a key indicator of financial health and scalability.

• Improves forecasting – Helps in revenue projections and financial planning.

Strategies to Improve NRR

1. Customer Success Focus: Invest in robust customer success initiatives to ensure high levels of customer satisfaction, adoption, and retention. Proactively engage with customers to understand their needs, address concerns, and drive value realization.
2. Segmentation and Personalization: Segment customers based on their usage, behavior, and needs, and tailor offerings and communications accordingly. Personalize upsell and cross-sell recommendations to provide relevant and valuable solutions to customers.
3. Product Innovation: Continuously innovate and enhance your SaaS product based on customer feedback and market trends. Introduce new features, functionalities, and integrations that address evolving customer needs and pain points, driving upsell opportunities.
4. Pricing Optimization: Review and optimize pricing strategies to maximize revenue potential while maintaining competitiveness and value perception. Offer tiered pricing plans, add-on options, and volume discounts to cater to diverse customer segments and use cases.
5. Retention-focused Metrics: Monitor leading indicators of churn and customer health, such as usage metrics, engagement scores, and satisfaction surveys. Implement early warning systems and intervention strategies to identify at-risk customers and mitigate churn proactively.
6. Customer Expansion Programs: Develop targeted customer expansion programs aimed at driving upsell and cross-sell opportunities. Offer incentives, promotions, and loyalty rewards to encourage customers to expand their usage and investment in your SaaS platform.
7. Trend Analysis: Track NRR trends over time to understand how customer relationships are evolving and to identify areas for improvement in retention and upselling strategies.
8. Benchmarking: Compare your NRR against industry standards and competitors to gauge your company's performance relative to the market.

Conclusion

Net Retention Rate (NRR) is a crucial metric for assessing the overall revenue growth from existing customers in SaaS businesses. By tracking NRR and implementing strategies to improve retention, expansion, and overall customer satisfaction, SaaS companies can drive sustainable revenue growth, enhance customer lifetime value (CLV), and strengthen their position in the market. By improving NRR SaaS businesses can unlock their full growth potential. Remember, the true value of a SaaS business lies not just in acquiring customers but in retaining and growing relationships with them over time.

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Looking to optimize your Net Revenue Retention (NRR)? Bentega helps SaaS companies track NRR for incentive compensation purposes. Learn more about NRR, SaaS retention strategies, and revenue forecasting on our blog.