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- What’s Net Retention?
- Net Revenue Retention Formula
- Why’s Net Retention Revenue Important?
- How to Improve Net Revenue Retention
Net revenue retention (NRR) is one of the most important metrics for many kinds of companies — especially SaaS companies. Measuring net retention helps businesses better understand the sustainability of their operations. A high net retention rate indicates growth potential, while a low net retention rate indicates your customers are frequently churning or downgrading their subscriptions.
Customer success professionals at software companies should prioritize net revenue retention as a KPI. Tracking NRR is one of the best ways to minimize churn and create sustainable growth without relying on frequent customer acquisitions. While a healthy business also needs new customers to grow, acquiring new customers is much more expensive than retaining and expanding existing revenue. Managing net retention rate effectively ensures the business doesn’t rely too heavily on expensive acquisitions and create growth that’s unsustainable.
It’s crucial for customer success professionals to understand net retention rate, including what it is, why it’s important, how to calculate it and how to improve it.
What’s Net Retention?
First and foremost: what is net retention? Net revenue retention is a metric that measures the amount of revenue your business retains from existing customers during a specific period of time. To calculate it on a monthly basis, use the following net revenue retention formula:
Net revenue retention rate = monthly recurring revenue (MRR) at the start of the month + expansions – churn – contractions / monthly MRR at the start of the month
We’ll explain this formula in more detail in a moment. However, first you need to understand the difference between net retention vs gross retention. People sometimes get these terms mixed up because they are very similar, but there is an important distinction.
Gross Revenue Retention vs. Net Revenue Retention
So the question is: gross revenue retention vs net revenue retention — what’s the difference? Both of these metrics measure the amount of revenue your business retains from existing customers over a set period of time (usually one month). However:
Net revenue retention includes expansion MRR (revenue generated during the month from upsells, cross-sells, and other added revenue from existing customers).
Gross revenue retention excludes expansion MRR and only takes lost revenue from existing customers into account. The formula for gross retention rate looks like this:
Gross retention rate = MRR at the start of the month – churn – contractions / MRR at the start of the month
As you can see, there’s not much difference between the formulas for net retention rate vs gross retention rate. However, since the gross retention rate calculation leaves out expansion MRR, it gives a more honest picture of how much downgrades and churn are affecting your bottom line.
How To Calculate Net Revenue Retention
To calculate your organization’s net retention rate, you need to have a few important pieces of information:
- Starting MRR – the total amount of recurring revenue your customer base generated for your business during the specified period of time.
- Churn MRR – the amount of revenue your business lost due to customer churn during the specified period of time.
- Contraction MRR – the amount of revenue your business lost due to existing customers downgrading their subscriptions during the specified period of time.
- Expansion MRR – the amount of revenue your business received due to upsells, cross-sells or other additions.
Using these four numbers, we can understand how to calculate both net revenue retention and gross revenue retention:
Net revenue retention rate formula
NRR = starting MRR + expansions – churn – contractions / starting MRR
Gross revenue retention rate formula
GRR = starting MRR – churn – contractions / starting MRR
Once you know how to calculate net revenue retention and gross revenue retention, the question becomes: what is a good net revenue retention rate? The answer depends heavily on the industry your business is in. SaaS companies should strive for a net revenue retention rate around 109% — and keeping it above 100% is nearly essential. If your business’s net retention rate is under 100%, that means it’s losing money from churns and contractions more quickly than it should be.
The answer to the question “what is a good net retention rate” is a little different in nearly every scenario. The most successful SaaS companies have net revenue retention rates of 150% or more.
Why’s Net Retention Revenue Important?
One of the best areas of focus for customer success teams is net revenue retention. SaaS companies in particular should pay close attention to both net and gross revenue retention.
Why is net revenue retention important? The answer mostly comes down to growth management. When your organization’s net revenue retention is greater than 100%, it means your revenue is growing just from existing customers alone. This is obviously a great position to be in. If your net revenue retention is below 100%, you’re losing more money from existing customers downgrading or churning than you’re gaining from expansions. For some kinds of businesses, a net retention rate between 90% and 100% is acceptable, but most of the time, you should aim to keep your net retention rate at about 100%.
Growth
One avenue of growth is acquiring new customers. However, acquiring new customers is much more expensive than retaining existing customers. If your business’s primary source of growth is frequently acquiring new customers, that growth probably isn’t very sustainable in the long run. If you can keep your net revenue retention higher than 100%, your business can grow sustainably with its current customer base alone.
Customer Health
Net revenue retention is a good KPI for determining sustainable growth potential, but gross revenue retention can sometimes be the better KPI for gauging customer success. Gross revenue retention excludes expansions from the equation, which provides a clearer picture of how much revenue your company is losing due to churn and account downgrades. Your customer success team can use this picture to track their efforts toward improving customer experience, providing more value to customers and ultimately reducing MRR lost to churn and contractions.
Valuation
If you’re planning on seeking financial support from investors, net revenue retention will be an important metric. Investors may look at net revenue retention for an indication of your company’s growth potential and future profitability, which will likely factor into how much they feel your company is worth.
How to Improve Net Revenue Retention
Once you understand the importance of tracking net revenue retention and maintaining a high net revenue retention rate, it becomes clear that learning how to improve net revenue retention is crucial for customer success.
Here are a few tactics you can use to improve your organization’s net revenue retention rate:
1. Gather Feedback
If your customers are frequently churning or downgrading their subscriptions instead of renewing or purchasing additional services, they probably don’t feel like they’re getting the value they want from your products or services. The best way to begin to remedy this problem is to learn why your customers are dissatisfied with the value they’re receiving. This usually requires gathering in-depth customer feedback.
One of the best ways to collect customer feedback is with customer satisfaction surveys. To encourage maximum participation, keep the surveys short and focus on just a few key questions about your customers’ experiences with your brand.
Reviews are another excellent source of customer feedback. Keep an eye on third-party customer reviews about your brand to identify the issues that are mentioned most frequently by dissatisfied customers.
2. Improve Customer Support
One of the most common reasons customers churn is poor customer service. Customers who have a bad experience while getting help or who struggle to receive help at all are at a much higher churn risk than customers who receive prompt and effective support when they need it. It’s up to the customer support team to make sure customers receive the latter experience every time.
A great way to improve your brand’s customer support experience is to improve customer education. Effective customer education can lead to self-sufficient customers who fully understand the products they use and need to contact customer support representatives less often. Providing more opportunities for customers to learn about your brand and your products is one of the best ways to reduce churn and improve net revenue retention. Using a learning management system like Northpass to build a customer academy is a highly effective way to educate your user-base efficiently.
Of course, there will always be times when direct customer support is necessary. It’s important to have a well-trained customer support team that can provide fast and effective solutions to customers who need them.
3. Revitalize Your Onboarding Process
Your customer onboarding process is extremely important because it’s the first experience new customers have with your brand. An effective onboarding process makes the customer feel confident in their new purchase and equips them with the tools and knowledge they need to succeed. Customers who have received a good onboarding experience are usually far less likely to churn, while customers who receive a poor onboarding experience often churn quickly.
A great way to improve your onboarding process is to use LMS software like Northpass to create a customized, self-guided onboarding path for your users. You can use Northpass’s customer education platform to house engaging onboarding courses where new users can access and complete them at their own pace.
