Understanding Net Revenue Retention (NRR)

Net Revenue Retention (NRR), also known as Net Dollar Retention (NDR), is a crucial metric for SaaS and subscription-based businesses. It measures the percentage of recurring revenue retained from an existing customer base over a specific period, taking into account upgrades, downgrades, and churn.

How NRR is Calculated

The NRR formula is designed to show how much revenue you've retained from your existing customers, factoring in all changes:

NRR = ((Starting MRR + Expansion MRR - Downgrade MRR - Churned MRR) / Starting MRR) * 100

Where:

• Starting MRR: Monthly Recurring Revenue at the beginning of the period.
• Expansion MRR: Additional revenue from existing customers (upgrades, cross-sells, add-ons).
• Downgrade MRR: Revenue lost from existing customers reducing their subscriptions.
• Churned MRR: Revenue lost from customers who cancelled their subscriptions.

Importance of NRR

NRR is a critical indicator of a company's health and growth potential because:

• Sustainable Growth: A high NRR (above 100%) indicates that your existing customers are generating more revenue, even if you acquire no new customers.
• Customer Satisfaction: It reflects customer satisfaction and the value they perceive from your product, leading to less churn and more expansion.
• Predictive Power: NRR is a strong predictor of future revenue and valuation, often favored by investors.
• Cost-Effective Growth: Expanding revenue from existing customers is generally more cost-effective than acquiring new ones.

NRR Example

Let's say a company has the following figures for a month:

• Starting MRR: $100,000
• Expansion MRR: $15,000 (from upgrades and add-ons)
• Downgrade MRR: $5,000 (from customers reducing plans)
• Churned MRR: $10,000 (from customer cancellations)

Using the formula:

NRR = (($100,000 + $15,000 - $5,000 - $10,000) / $100,000) * 100

NRR = ($100,000 / $100,000) * 100

NRR = 100%

In this example, the company retained exactly 100% of its starting revenue, meaning expansion revenue perfectly offset downgrades and churn.

Frequently Asked Questions (FAQs)

• Q: What is a good NRR?

  A: For most SaaS companies, an NRR of 100% or higher is considered good. Top-performing companies often achieve 120% or more, indicating strong product-market fit and customer success.

• Q: How does NRR differ from Gross Revenue Retention (GRR)?

  A: GRR only accounts for churn and downgrades, not expansion. It measures the percentage of revenue retained without considering any new revenue from existing customers. NRR includes expansion, providing a more complete picture of existing customer value.

• Q: Can NRR be over 100%?

  A: Yes, absolutely! An NRR over 100% means that the revenue gained from existing customer expansion (upgrades, cross-sells) is greater than the revenue lost from churn and downgrades.

• Q: How often should NRR be calculated?

  A: NRR is typically calculated monthly or quarterly to track trends and assess the effectiveness of customer success and product strategies.