What is Net Revenue Retention in SaaS and How to Calculate it Correctly

What is Net Revenue Retention in SaaS and How to Calculate it Correctly

Net Revenue Retention is the widely used customer success KPIs to measure the performance of a SaaS business. But, how do you calculate it? Read on.

What is Net Revenue Retention in SaaS and How to Calculate it Correctly
What is Net Revenue Retention in SaaS and How to Calculate it Correctly

With the distribution model of the software totally changed in the SaaS industry, there are many new concepts and metrics that have come to use. Net revenue retention is one of those that we will be discussing in this article today.

If you are into SaaS business then churn is the most common devil you must be fighting against. Customers have not committed to your business anymore. The moment they decide to quit, they can do so very easily by switching to your competitors. The lower switching cost has made it even easier for them to consider a new vendor.

No doubt, new customer acquisition is still a major need for any sustainable business, retaining existing ones is a new need specific to the SaaS industry. The concept is that instead of recovering your ROI on a SaaS business through a one-off purchase, the customers are expected to pay the recurring cost in a longer duration. This keeps the business growing in a steady and consistent manner.

Yet there are few pitfalls that businesses have to avoid in their growth journey. The choices that customers have while staying in your business have become more. So few of those choices are good for you while others are perilous to your business.

To keep your business safe from such perils you have to use the right metrics to measure your business health accurately. Based on those metrics you can take corrective measures to keep your growth graph rising.

What is Net Revenue Retention?

Net revenue retention (NRR) measures the proportion of earned revenue from repeat customers and predicts the potential for business expansion. When all active subscriptions for a given month are considered, monthly recurring revenue, or MRR, forecasts total revenue.

It is one of the widely used customer success KPIs to measure the performance of a SaaS business. It measures the overall impact on the revenue generation from your existing customers. Now, through existing customers, the following are the cases when your revenues are impacted:

  1. When customer churns or leaves your business.
  2. When customer downgrades to a lower-paying plan.
  3. A customer buying a new product from your company.
  4. A customer upgrading to a higher subscription plan.

All these above cases have a direct impact on your total revenue generation on a monthly or annual basis. When you consider all these changes along with the recurring revenues your customers are paying, you get a clear picture of the revenues that are generated from these existing customers. This metric is called net revenue retention.

What does SaaS Net Revenue Retention Indicate?

If this KPI has a value over or under 100%, it shows the health of a business through its existing customers accordingly. When it is above 100%, it means the business is healthy and is able to grow even without acquiring new customers. It also shows that the revenue generated from upgrades and cross-sells are more than the revenue lost due to churn or downgrades.

Just a slight change in net revenue retention can result in big numbers in a longer period. The reason is obviously the compounding effect over years.

Hence, this is a clear indicator of any negative impact of customers on business while also capturing their positive impact.

How to Calculate it?

How to calculate net revenue retention?

To calculate net revenue retention, we need to have following 4 different values:

  1. Monthly recurring revenue of the last month (A)
  2. Revenue generated through upgrades and cross-sells (B)
  3. Revenue lost through downgrades (C)
  4. Revenue lost through churn (D)

So, the formulae for calculating net revenue retention rate is:

NRR = (A + B – C – D) / A

To put this in an example, let’s assume company A had a monthly recurring revenue of $50,000, they expanded their business through upgrades and cross-sell at $5000. Few of their customers downgraded which resulted in a loss of $2000 and another $1000 in churn.

So, NRR = (50,000 + 5000 – 2000 -1000) / 50,000 = 104%

This shows that the company is still growing after the losses incurred through churn and downgrades. This phenomenon is called net negative churn. Every SaaS business must aspire to achieve this goal. This shows that a company can still grow without acquiring any new customer.

Ways to Enhance Your Net Revenue Retention by Reducing Customer Churn

Churn is a reality in the B2B SaaS economy. But, by adopting customer centricity, you can minimize this churn rate and enhance your net revenue retention. Here are some of the ways to do that:

Provide in-app support service to enhance your customer experience

By providing in-app support service, you can ensure a positive customer experience which, in turn, will have a drastic impact on the number of support issues you usually encounter. Most of the customers will be able to find the answer to their questions right from the app.

You can even have a knowledge base on your site to provide information about your app to the customers.

By reducing the knowledge gap, you can enhance the user experience, which can be invaluable in making them your brand promoters in the long run.

A prime example of that is having a direct walkthrough from your app itself, through which your customers can go through your knowledge base and get resolutions for their queries.

Employing NPS to ascertain when a particular customer is about to churn

By using in-app NPS surveys, you can get adequate information on whether a customer will stick around for a long time. Also, with the help of subjective questions, you can learn about their pain areas and can make ways to eradicate them.

After the NPS survey, you accumulate the information and scrutinize it to find out customers with low NPS scores and try to find out their concerns before they actually churn.

You can ascertain patterns using the NPS survey to determine whether a customer is unhappy with your product and then use that information to ensure that they stick around for a longer period.

Employ churn surveys to find out the real reason for your customers to churn

A primary way to check why your customers are churning out is by using a churn survey. With the help of the survey, you can evaluate whether there is any improvement that needs to be done in the product.

You can take the opportunity to contact your customers that have churned by asking them to fill out a survey and ask them the simple question – Is there anything that we can do to have you stick around with us. This question needs to be asked when they are about to hit the cancellation button on the subscription.

The answers will help you improve your product to ensure that such things do not happen in the future.

Make the onboarding process simpler for customers

The first contact that a new customer will have is during the sign-up process. Therefore, you must minimize the steps required to get this process done.

In case you find that your customer onboarding process is too complex or overwhelming, ensure that you take effective steps to simplify the process.

If you do not, it will hamper your potential customers from completing the sign-up process and going to some other SaaS provider.

Provide long-term contracts to the users during subscription

One of the primary mistakes that B2B SaaS companies make is having monthly contracts for subscription packages. Instead of that, we recommend you have a quarterly or half-yearly subscription package.

By providing long-term contracts at a discounted price, you give your customers adequate time to stick around for a longer time and see how it can benefit them. And once they are able to derive benefit from it, they will undoubtedly stick around for a long time.

Contact those customers who have churned recently and inform them about your long-term subscription packages. We would suggest you personalize your email while sending it to each customer.

Bifurcate your customers into specific groups

We would recommend you segment your customers into different categories. This will help you to target them precisely and perfectly. This way, you will also ascertain which group is churning too frequently. Once you find a pattern, you can work on ways to address their concerns.

Net Revenue Retention vs Gross Revenue Retention

Gross revenue retention (GRR) includes the recurring revenue from your existing customers including downgrades and cancellations. The only difference between GRR and NRR is that GRR doesn’t include business expansion through upgrades and cross-sells. It indicates how a company is doing in retaining revenues from its customers. It will be always less than 100% and will be equal to or less than the NRR.

GRR is one of the major metrics investors check to measure the health of a business. Low GRR shows your business is not viable over the long-term. If you are not able to retain customers over the long term that means your business has serious challenges to address.

Which is the Best?

When it comes to choosing NRR or GRR, it is best to use both for the different information they reveal about your business. NRR gives you a more realistic picture of how much growth can you expect from your existing customers. While GRR gives you the amount you could have made through your existing customers if they didn’t churn. GRR is especially helpful to measure the long-term growth of your business.

Net Revenue Retention in SaaS: Frequently Asked Questions (FAQs)

Q 1: Is there a definite meaning connected with the phrase – NRR is more than 100%?

A 1: When the NRR is more than 100 percent, the CSM has more upsell and cross-sell opportunities to generate more revenue instead of crying over the revenue lost over the churned customers. So, when NRR is more than 100 percent, the company is able to generate more revenue and recover the lost revenue from the churned customers.

Q 2: Is there a major difference between Net Revenue Retention (NRR) and Gross Revenue Retention (GRR)?

A 2: Net Revenue Retention takes into consideration expansion for calculation. On the other hand, Gross Revenue Retention does not consider expansion for calculation. Here expansion means upgrades done by the customers. You can use Gross Revenue Retention (GRR) to measure revenue stability and Net Revenue Retention (NRR) to get an overall picture of growth and revenue flow.

Q 3: What is the number one reason to track Net Revenue Retention Rate (NRR)?

A 3: Net Revenue Retention (NRR) is a crucial metric that helps gauge the financial performance of a company. When you peep into the NRR data, it gives you comprehensive details about expansion, retention, financial stability, and growth. When you regularly compute the NRR of a company, it helps you take requisite action against contingencies instead of only doing damage control.

Q 4: What are the diverse ways to enhance your net retention rate by reducing customer churn?

A 4: Here are some of the ways to enhance your net retention rate by reducing customer churn:

  • Provide in-app support service to enhance your customer experience
  • Employing NPS to ascertain when a particular customer is about to churn
  • Employ churn surveys to find out the real reason for your customers to churn
  • Make the onboarding process simpler for customers
  • Provide long-term contracts to the users during the subscription
  • Bifurcate your customers into specific groups

Final Take: Grow your Net Revenue Retention

It is a well-known fact that a happy customer is more likely to spend more on your business than a new customer. If you are selling your software for say $50/month, then your goal as a SaaS expert should be how can you grow that number from $50 to $100/month. You need to find ways to expand your business with the existing customer. This is the most important shift in the business model that SaaS has brought.

When it comes to business expansion through existing customers, retaining the recurring revenue, which means preventing revenue churn is of course the foremost important goal. But that’s not the end of the story.

Apart from upsell and cross-sells, you must also revise your SaaS pricing on a regular basis. But that must be supported with some rationales behind it. Inflation is no doubt the most obvious one but nothing could be more convincing to the customers than regular product updates and improvements.

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