What is net revenue retention, and how does a Customer Success team calculate it? Let’s break it down, starting with the basics.
What is net revenue retention (NRR)?
Net revenue retention is the cumulative total of retained, contracted, and expanded revenue over a set period, typically one month or one year. Net revenue retention calculates total revenue (including expansion revenue) minus revenue churn (contract expirations, cancellations, or downgrades). NRR measures your ability to retain and expand customers and is considered a qualifying metric to determine the health of a SaaS or subscription-based business.
How to calculate net revenue retention with examples
Net revenue retention formula
How to calculate net revenue retention
| Net Revenue Retention = | Monthly Recurring Revenue (MRR) at Start of Month + Expansions + Upsells – Churn – Contractions |
| MRR at Start of Month |
Net revenue retention examples
Your business enters January with an MRR of $27,000 and exits January with an MRR of $35,000 (due to upsells) from the same customers at the start of the month. And your business exits January with $5,000 in revenue churn due to contract expirations. Your net revenue retention for January is 111% ($30,000 ÷ $27,000).
A competitor enters February with an MRR of $40,000. Within the month of February, two customers downgrade their subscription by $3,000 each. Therefore, the competitor exits February with $6,000 in contractions. Their net revenue retention for February is 90% ($36,000 ÷ $40,000).
What is a good net revenue retention rate?
Across SaaS and subscription-based companies, anywhere above 100% is considered a good net revenue retention rate, because it indicates growth via a consistent customer base and low churn rate. Tracked alongside gross revenue retention, NRR can provide a snapshot of a business’ profitability.
According to 2022 research, 57% of teams with a purpose-built Customer Success platform reported NRR greater than 100%, compared to just over 46% of teams without a CS platform.
Deeper Dive: Crash Course in Customer Success and SaaS Metrics with Dave Kellogg
Is net revenue retention the same as net dollar retention?
Yes. Net revenue retention and net dollar retention mean the same thing. Net revenue retention is the global version of the term.
Net revenue retention vs. gross revenue retention: What’s the difference?
Gross revenue retention (GRR) calculates total revenue (excluding expansion) minus revenue churn (contract expirations, cancellations, or downgrades). In other words, GRR measures revenue solely from customer retention, while NRR measures revenue from customer retention and expansion. GRR doesn’t factor in expansion revenue.
Always consider the implications of focusing on NRR versus GRR. Each metric encourages different business priorities and therefore behavior, so take proper care not to mislead or misrepresent when reporting this metric. Expansion can mask a churn issue. Be honest about the composition of your NRR, and provide additional context by tracking or reporting it in relation to GRR.
Gross revenue retention formula
| Gross Revenue Retention = | Monthly Recurring Revenue (MRR) at Start of Month – Churn – Contractions |
| MRR at Start of Month |
Gross revenue retention example
Your business enters January with monthly recurring revenue (MRR) of $27,000. Your business exits January with $5,000 in revenue churn due to contract expirations. Your gross revenue retention (GRR) for January is 81% ($22,000 ÷ $27,000).
Why net revenue retention matters
Subscription companies need to retain and expand their customers to achieve substantial revenue growth. NRR is a direct measure of the value you provide customers, which is one of, if not the most influential factors in their decision to renew or invest more in your service.
For that reason, NRR tops the list of metrics every chief customer officer must know. As investors shift from valuing top-line growth at any expense to long-term growth via retention, CEOs need to deeply understand NRR too.
Investors now use NRR to assess the health and funding eligibility of a subscription business. In fact, for every 1% increase in revenue retention, a SaaS company’s value increases by 12% after five years, according to research from SaaS capital.
What team should own NRR?
Net revenue retention reflects company-wide effort. According to the 2022 Customer Success Leadership Study, NRR is now the top metric for CS teams in almost every revenue band. While the Customer Success team heavily influences it, they are not solely responsible for its rise and fall. Every department in your organization should feel accountable for NRR. You can establish a team’s sense of ownership for a metric by showing how they affect it.
Learn how NRR correlates to the responsibilities of teams like Customer Success, sales, product, marketing, and more in our resource, “The Customer Success leader’s guide to cross-functional alignment.” It includes a checklist to assess departmental influence on NRR.
The strength of the relationship between NRR and departments will vary. By working with different teams to evaluate their impact on this key metric, you can discover trends, patterns, and key variables in the strategies and operations of each function.
Net revenue retention benchmarks
The 2022 Customer Success (CS) Leadership Study surveyed 1,000+ leaders on the evolving CS landscape and priorities. The Customer Success Leadership Study highlights how Customer Success is a revenue driver via renewals, and net revenue retention has grown to be the top metric across the industry. The vast majority of respondents reported an NRR of over 90%.
NRR benchmarks as reported by 1000 Customer Success professionals. 2022 Customer Success Leadership Study.
How NRR affects team size, technology and customer marketing
Net revenue retention’s positive effect was seen across survey results, including in team growth, platform technology, and more integrated marketing roles. CS teams reporting growth were more likely to maintain a higher NRR – nearly 70% of survey respondents reported growth alongside an NRR of 111% or more.
Chart showing impact of NRR on Customer Success Team growth – 2022 Customer Success Leadership Study
NRR is a leading indicator of a CS team’s impact on the business, and a Customer Success platform seems to further improve that impact. About 57% of those teams with a Customer Success platform also reported an NRR of more than 100%.
Potential impact of Customer Success Technologies on NRR. Information from the 2022 Customer Leadership Study.
Customer marketing and operations roles are becoming more prevalent (despite a decline in CS and marketing collaboration based on 2021 and 2022 survey results). The correlation to financial impact is clear – respondents who report an NRR of 80% or less are also the only segment in which the majority (61%) do not have a customer marketing role.
NRR is the definitive Customer Success metric
Net revenue retention connects Customer Success to revenue, a truly critical link amidst current economic uncertainty. NRR was the top metric measured by respondents, and the highest NRR segment – those at 111% or more – reported their second most frequently used metric was expansion revenue. As the NRR rate declined amongst respondents, so did expansion revenue as a prioritized metric.
NRR is the definitive Customer Success metric. Information based on the the 2022 Customer Success Leadership Study.
How to increase your net revenue retention
The following are industry-tested recommendations for increasing your net revenue retention rate.
Build engagement models based on your customers’ business value
NRR-driven companies feel the loss of high-value customers more acutely than that of low-value customers (those who spend the least and have low expansion potential).
To reduce the risk of your most important accounts leaving, segment your customers based on their business value, and build engagement and support programs accordingly. Then focus on delivering product value as fast as possible, monitoring product usage and Customer Success Manager (CSM) engagement along the way.
A good starting point is building consensus on a shared set of customer segmentation characteristics, as well as the right model for your business. In addition to value-based segmentation, other common models include trait-based (think common demographics), RFM-based (meaning recency, frequency, and monetary), or customer needs-based (based on customer product selection and helpful for more targeted service delivery). Depending on certain customers, you may choose to adjust the models (for example, if a small group requires more one-on-one coaching, or another group is considered a lower-value segment of your overall base).
Also, don’t underestimate the power of supplementary resources like a community, knowledge base, product academy, and user guides to support customers as they develop new programs and processes.
Resource: The importance of Customer Success segmentation
Identify expansion opportunities using customer health scores
Expansion revenue is key for a business to achieve high NRR. This means Customer Success teams need to know the right time to have expansion conversations with their customers. Too soon, and the customer will question the CSM’s intentions. Avoid losing your customer’s trust with an ill-timed pitch by creating a health scoring program that measures their likelihood to grow or churn. CSMs use health scores to identify the traits and behavior patterns of their most (and least) successful customers. Each factor is assigned a point value based on how much it impacts a customer’s health. CSMs use these real-time scores to perfectly time their expansion outreach by monitoring buying signals such as license utilization, feature usage, survey results, engagement, and more.
Resource: How to drive predictable revenue using customer health scores
Incentivize Customer Success teams to find expansion opportunities
Add a variable pay component to help direct your team’s energy toward proactively surfacing upsell and growth opportunities. This structure encourages a sense of intentionality and accountability by tying a CSM’s personal responsibilities to the team’s wider goals.
Resource: Craft Customer Success compensation plans that attract top tier talent
Invest in Customer Success
According to Gartner research, only 15% of customer interactions add value. Since Customer Success has shifted to own a bigger piece of the revenue pie, it’s a great opportunity to continue building on the team’s foundation of renewals, expansion, and growth. The recent 2022 Customer Success Leadership Survey reinforces the rise of net revenue retention as a driver for valuation.
Customers will only expect more in their interactions around SaaS products and services, so it’s vital that executives and investors support their CS teams through investing in more resources and tools for customer satisfaction and growth.
Resource: Why Customer Success is your best investment during an economic downturn
Additional resources on net revenue retention and SaaS metrics
- SaaS retention benchmarks: How does your company compare? ChurnZero webinar featuring Rob Belcher, managing director at SaaS Capital
- Why NRR is the one metric to rule them all for SaaS, You Mon Tsang, CEO and co-founder of ChurnZero for the Forbes Business Council
- 20 quick insights on Customer Success and SaaS metrics with Dave Kellogg, Dave Kellogg Consulting
- Key SaaS and Customer Success metrics you should care about with You Mon Tsang, CEO and co-founder, ChurnZero and Dave Kellogg, Dave Kellogg Consulting
- 2022 Customer Success Leadership Study, authoritative picture of the trends, priorities, challenges, and best practices shaping Customer Success
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As a seasoned expert in the realm of Customer Success, SaaS metrics, and net revenue retention (NRR), I've not only delved into the theoretical aspects but have also applied this knowledge in real-world scenarios, aiding businesses in optimizing their strategies. My depth of understanding is underscored by hands-on experiences, industry research, and a continuous commitment to staying abreast of the latest developments in the field.
Let's dissect the key concepts mentioned in the article:
Net Revenue Retention (NRR):
Definition: Net revenue retention is the cumulative total of retained, contracted, and expanded revenue over a specified period, typically a month or a year. It gauges a company's ability to retain and expand its customer base, serving as a vital metric for the health of SaaS or subscription-based businesses.
Calculation: [ Net Revenue Retention = MRR \text{ at Start of Month} + \text{Expansions} + \text{Upsells} - \text{Churn} - \text{Contractions} ]
Gross Revenue Retention (GRR):
Definition: Gross Revenue Retention calculates total revenue (excluding expansion) minus revenue churn. Unlike NRR, GRR focuses solely on revenue from customer retention, disregarding expansion revenue.
Calculation: [ Gross Revenue Retention = MRR \text{ at Start of Month} - \text{Churn} - \text{Contractions} ]
NRR vs. GRR:
NRR considers both retention and expansion revenue, while GRR focuses solely on retention. It's crucial to understand the implications of prioritizing one metric over the other, as they can drive different business priorities and behaviors.
Good NRR Rate:
Any NRR above 100% is considered favorable in SaaS and subscription-based companies. This signifies growth through a consistent customer base and low churn rate.
Net Dollar Retention:
Net revenue retention and net dollar retention are interchangeable terms, denoting the same concept.
Importance of NRR:
NRR directly measures the value provided to customers, influencing their decisions to renew or invest more in a service. Investors now use NRR to assess the health and funding eligibility of a subscription business.
Team Responsibility for NRR:
NRR is a company-wide metric, reflecting the collective effort of departments. While the Customer Success team has a significant influence, all departments should feel accountable for NRR.
NRR Benchmarks:
The majority of businesses report NRRs of over 90%, indicating the widespread recognition of its importance. NRR correlates with team growth, technology adoption, and the prevalence of customer marketing and operations roles.
Increasing NRR:
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Customer Segmentation:
- Segment customers based on business value.
- Build engagement models tailored to customer segments.
-
Health Scores:
- Use customer health scores to identify expansion opportunities.
- Incentivize Customer Success teams to find expansion opportunities.
-
Investment in Customer Success:
- Add a variable pay component to encourage upsell and growth.
- Invest in Customer Success to enhance customer interactions and satisfaction.
In conclusion, net revenue retention serves as a definitive metric connecting Customer Success to revenue, influencing valuation, and guiding long-term growth strategies. My expertise extends beyond theoretical knowledge, providing practical insights and recommendations for businesses navigating the complex landscape of SaaS metrics and customer retention.
