Understanding Net Retention Rate (NRR)

Adding new customers should remain a goal for any company. But new business alone isn’t enough to maintain healthy, sustainable growth. To achieve this, you need to focus on both retaining your existing customers and expanding the revenue you get from them. That means going beyond Monthly Recurring Revenue (MRR) and tracking your Net Retention Rate (NRR) as well.

Here’s everything you need to know to calculate and understand NRR in order to grow your SaaS business.

What Is Net Retention Rate? (H2)

Net Revenue Retention (NRR) measures how much your revenue from existing customers has grown or shrunk over a set period of time. Also referred to as Net Dollar Retention (NDR) or Net Revenue Retention, NRR tells you how well you are retaining and engaging your customers, giving you a good indication of your organizational health.

NRR does this by taking either your Monthly Recurring Revenue (MRR) or Annual Recurring Revenue (ARR), then factoring-in customer expansions, downgrades, and churn. The result is expressed as a percentage. Anything less than 100% means your revenue will contract if you do not add more customers, while anything greater than 100% means your revenue will increase even without new customers coming in.

NRR Calculation

Calculating NRR is fairly straightforward, although it does involve a number of different metrics.

Here is this formula:

NRR = (MRR + Expansion - Downgrades - Churn)/MRR

Note: Depending on your needs and/or preferences, you can use ARR instead of MRR. Let’s break these various metrics down to better understand what goes into NRR:

• MRR/ARR: This is a measure of how much recurring revenue you have earned from existing customers over either a specified monthly (MRR) or yearly (ARR) period.

• Expansion: This refers to any revenue you have earned from existing customers who have upgraded or expanded their accounts. This typically comes from upsells and cross-sells.

• Downgrades: This refers to any revenue you have lost from existing customers who have downgraded their accounts.

• Churn: This refers to revenue you have lost from existing customers who have canceled their accounts and withdrawn their business altogether.

Here’s an example to help you better understand how these metrics work together to produce NRR:

Say your business has a starting MRR of $10,000.

During this month, some customers upgraded their plan and added $1,000 in recurring revenue.

At the same time, some other customers downgraded their accounts, reducing your recurring revenue by $500 and a few others canceled their accounts altogether, further reducing your revenue by another $200.

After adding these figures to your starting MRR, you’ll have an adjusted MRR of $10,300.

Divide this by the starting MRR ($10,000) and your NRR is 103%.

Here’s how this looks in the formula:

(10,000+1000-500-200)/10,000=1.03 or 103%

Why Is NRR an Important Metric?

NRR has emerged as a key metric for SaaS companies and their investors, particularly when it comes to evaluating the overall sustainability and long-term potential of the business. The reason for this is that, compared with other key metrics, NRR produces the clearest portrait of a company’s financial health.

What NRR Tells Us

A good NRR is a clear and meaningful sign that a company’s product or service is successfully engaging customers and meeting their needs. A poor NRR, in contrast, indicates that there is something wrong with the product, its delivery, or its overall strategy.

Other metrics, such as MRR and Gross Dollar Retention (GDR), can also be used to assess the performance of a company, but NRR is the most accurate way of measuring consistent and sustainable growth. While new customer acquisitions can mask high rates of churn or downgrades in other metrics, NRR focuses solely on creating a portrait of existing customers' behavior. This is considered the core driver of long-term revenue growth since it is a measure of both retention and expansion from existing customers – both signals of a healthy and viable business.

Because of this, VCs and other investors will be very interested in measuring a company’s NRR. Especially since so many aspects of the current market are considered volatile, an NRR of 100% or more is a sign of stability that is hard to ignore. Even better, an NRR of over 100% means a business has the capacity to grow revenue from existing clients only. While the expansion of one or two large clients can potentially skew these numbers by concealing churn, an NRR of 100% or more is typically considered a sign of robust health.

Net vs Gross Dollar Retention

Here’s a quick note on the difference between NRR/NDR and Gross Dollar Retention (GDR). While both NRR and GDR measure existing customer revenue, GDR is a measure only of the amount of revenue your business keeps after subtracting churn and downgrades. Because of this, the maximum GDR you can have is 100%, which would mean you had a churn and downgrade rate of zero.

In contrast, NRR measures revenue after subtracting churn and downgrades, but also after adding customer expansions. This is the reason why NRR can go above 100%. Even after churn and downgrades have been accounted for, if there are enough expansions to raise revenue above the starting MRR or ARR, then NRR will reflect this.

What Does a Good Net Revenue Retention Look Like?

As stated above, you should be aiming for an NRR of 100% or more. The higher you can get it, the better off your company will be, as this is a good sign that you have happy customers who want to continue doing business with you.

More specifically, your NRR goals will largely depend on the type of businesses you are selling to. As a benchmark, here are some NRR rates for prominent SaaS companies before their IPO:

SMB

• Shopify: 100%

• Hubspot: 100%

• SurveyMonkey: 100%

SMB/Enterprise Mix

• Box: 106%

• New Relic: 116%

• Zendesk: 116%

Enterprise

• Okta: 120%

• Medallia: 120%

• Qualtrics: 122%

If you are selling to individual consumers or SMBs, then a good NRR rate will be at 105% and above. That’s because price points are typically smaller for these types of customers, meaning that they have less invested in the relationship and thus will be more likely to churn.

But if you’re selling to enterprise customers, you’ll want an NRR rate of 110% or above. This is because you’ll likely have a price point that is much larger, meaning customers have a lot more incentive to stick around.

As you can see, the type of business you are selling and marketing to matters a lot. Keep this in mind as you begin tracking your NRR. When comparing yourself to other organizations, try to find ones that match your size, product, and customer. And always aim for as high as you can go.