What Is Net Revenue Retention (NRR)?

Posted on

Your company relies on subscriptions and expansion to stay competitive, so understanding the health of your subscriptions is essential. Net revenue retention (NRR) is a critical metric for any company offering software-as-a-service (SaaS) products or a subscription-based business model.

NRR is a holistic metric that reflects all the recurring and new revenue your company generates over a given period, which is usually either monthly, quarterly or yearly. This metric also factors in your total losses in the amount of revenue your business loses over the same period due to customer churn or subscription downgrades.

If you want insight into how well your business retains customers and grows revenue through account expansion, NRR is what you need to pay attention to.
 

Gross Revenue Retention vs. Net Revenue Retention

Gross revenue retention (GRR) and NRR are similar in that they both measure the amount of revenue retained from existing customers while accounting for revenue lost to churn. However, NRR includes all revenue generated during a given period while GRR excludes expansion revenue.

Tracking both NRR and GRR can help you understand the total profitability of your business, which is a useful metric for identifying opportunities for business growth.
 

What Is Net Recurring Revenue Retention (NRRR)?

While NRR is a broad metric including all revenue streams, net recurring revenue retention is a more specific metric that excludes all non-recurring revenue, such as one-time purchases, upsells and cross-sells.

Because it includes non-recurring as well as recurring revenue, monitoring only your standard net revenue retention rate can skew your metrics and potentially hide subscription issues. Tracking your NRRR along with net revenue retention can help you:

  • Understand subscription health: NRRR focuses entirely on recurring revenue from existing customers, which is valuable for assessing the strength and stability of your current subscriptions.
  • Forecast future recurring revenue: Because NRRR excludes volatile non-recurring revenue, it provides a more reliable metric for projecting future performance.
  • Identifying recurring revenue issues: NRRR can help you pinpoint issues such as high churn and low expansion more effectively than you would be able to using net revenue retention.
  • Discover areas of opportunity: Retaining more customers is significantly more cost-effective than constantly bringing in new subscribers. Monitoring your NRRR can help you identify trends in subscriber renewals and expirations, which can uncover new opportunities to add value to subscriptions.

 

Breaking Down the Net Revenue Retention Formula

The net revenue retention formula includes several variables:

  • Starting MRR: Revenue gained from existing customers in the past month
  • Expansion MRR: Revenue generated from existing customers who upgraded or purchased other products and services
  • Contraction MRR: Revenue lost when existing customers downgraded or otherwise reduced their spending
  • Churn MRR: Revenue lost when customers allowed contracts to expire without renewing

Once you know all of the above information, you can plug in your data and begin calculating net revenue retention. This calculation should follow these steps:

  1. Add together your starting MRR and your expansion MRR to get the total revenue generated from existing customers that month.
  2. Add together your contraction MRR and churn MRR to get the total revenue lost from existing customers that month.
  3. Subtract your revenue lost from your revenue generated.
  4. Divide this number by your starting MRR.
  5. Multiply the result by 100. This final number is your net revenue retention rate, for the period.

 

What Is a Good Net Revenue Retention Rate?

Your business should aim for an NRR rate over 100%. This number indicates a loyal customer base that both continues their existing subscriptions and grows enough revenue from them through expansion to offset churn- and contraction-related losses.

An NRR under 90% indicates that your company experiences significant churn and contraction losses each month, which you’ll want to address as soon as possible. To raise your NRR, you’ll need to add value to your existing offerings to convince customers to renew their subscriptions.
 

Net Revenue Retention Rate Calculation Example

Here’s a quick example of how to calculate net revenue retention. Let’s say your business enters March with a starting MRR of $37,000 and an expansion MRR of $5,000. You also have a contraction MRR of $2,000 and a churn MRR of $1,000 at the end of the month.

Plugging these variables into the equation will give you your final MRR for the month:

(37,000 + 5,000) – (2,000 + 1,000) = $39,000

You’d then divide your result by your starting MRR ($37,000) to get the proportion of revenue gain to revenue loss:

39,000 / 37,000 = 1.05

To get your final answer, you’d then multiply the above number by 100:

1.054 x 100 = 105%

Your NRR rate for March is 105%, which indicates that your business is doing an excellent job of retaining customers and expanding their typical spending, which offsets the losses from contraction and churn.
 

How to Improve Net Revenue Retention

Because the two metrics are so similar, most of the strategies you take to improve your NRR will also improve your GRR, and vice versa. Determining the best approach to take includes three basic steps:

1. Establish Benchmarks

Setting net revenue retention benchmarks helps you understand typical patterns in monthly revenue retention and expansion. The ideal benchmark for each company varies depending on several factors:

  • Industry standards
  • Target market
  • Company maturity
  • Business model
  • Pricing strategy

Once you have determined your ideal NRR benchmark, it’s important to track your own NRR over time to establish a baseline for your company’s performance. This measurement will give you a starting point you can use to measure your NRR growth.

2. Identify Areas for Improvement

Once you know your benchmark NRR, you’ll want to determine how to reduce churn and increase revenue from your existing customers.

For example, are customers letting their subscriptions expire because renewing is a complicated process? If so, you could streamline the renewal process with automation to minimize churn by reducing the risk of customers forgetting to renew their subscriptions on time.

3. Implement Improvements

Some simple improvements you can make to a subscription-based business include:

  • Streamline onboarding: A simplified, smooth onboarding process can help you reduce time to value (TTV), enhance customer engagement and increase your potential for revenue.
  • Better support customers: Improving customer support and helping customers thrive with your product can help secure more revenue by empowering your subscribers to make the most of their investment.
  • Encourage upsells: Empower your sales team to upsell and cross-sell additional products and services to your customers to expand recurring revenue.
  • Add self-service options: Streamlined self-service portals let customers manage subscriptions and account settings on their own terms, providing a more convenient experience.
  • Simplify payment processes: Switching to omnichannel payment processing gives customers the ability to choose how they pay, making each transaction smoother and more convenient. Automated payment options can also enhance the experience by eliminating missed payments and ensuring continuous service.

 

Boost Your NRR With CSG Forte’s Scalable Payment Solution

If you’re looking to increase your NRR by adding value to your subscription or SaaS business, CSG Forte’s end-to-end payment platform can help.

CSG Forte is a high-performance, processor-agnostic solution that integrates seamlessly into your tech stack for convenient access and operation. We have more than twenty years of experience in the digital payment space and have served companies across various industries, so we have the knowledge and expertise to ensure a smooth implementation.

Contact our payments experts today to learn more about retaining revenue with CSG Forte’s payment platform.

Boost Your NRR With CSG Forte's Scalable Payment Solution