What is Net Revenue Retention?
Net Revenue Retention, or NRR, measures a SaaS company's ability to retain and grow its existing customers over a given period. Net Revenue Retention measures the net increase or decrease in revenue generated from existing customers, taking into account any churn or customer cancellations, downgrades, and upgrades.
Why Net Revenue Retention Is Important
Net Revenue Retention is an essential metric for SaaS companies, because it reflects the true health of the business. It provides insight into the company's ability to retain and grow its existing customer base, which is critical for long-term growth and sustainability. High Net Revenue Retention indicates that the company has a loyal customer base, is delivering value, and is effectively upselling its existing customers.
By understanding Net Revenue Retention, SaaS companies can identify areas for improvement in customer retention and upsell strategies, which ultimately drive long-term growth and profitability.
How to Calculate Net Revenue Retention
Net Revenue Retention is calculated by taking the revenue generated from existing customers at the beginning of a given period, adding any expansions or upgrades and subtracting any churn or customer cancellations.
The following is the formula to calculate Net Revenue Retention:
Net Revenue Retention = ((Beginning Revenue + Expansion & Upgrade Revenue - Churn & Downgrade Revenue) / Beginning Revenue) x 100
Suppose a company has an ARR of $1,000,000 at the beginning of the year. During the year, the company added $200,000 from upsells and expansions and lost $50,000 from churned customers.
Net Revenue Retention = (($1MM - $50K + $200K) / $1MM) x 100 = 115%
In this example, the Net Revenue Retention is 115%, which means the company was able to retain and grow its existing customers by 15% during the year.