Net Revenue Retention (NRR) is a percentage that compares the amount of recurring subscription revenue you retain from your existing base of customers to the amount of new revenue you generate from them.
It’s one of the key metrics used to evaluate SaaS businesses, as it reflects a combined view of customer satisfaction and expansion.
Growing a SaaS business is hard. In fact, it’s particularly hard when you're in the early stages and have yet to attract new customers.
You'd like nothing more than for your product or service to take off and generate revenue right away—but it doesn't always work out that way.
Many startups experience what's known as "the trough of sorrow" during their first year or two of operation. They might see some initial success, but then revenue growth stalls for an extended period before picking back up again.
There are lots of factors that can contribute to this phenomenon (including how well your product is positioned within its market), but one thing that can help identify why revenue growth has stalled is tracking Net Revenue Retention (NRR) and its components.
Net Revenue Retention is calculated by measuring your starting Monthly Recurring Revenue (MRR) for all customers, subtracting Contraction MRR, subtracting Churn MRR, and adding Expansion MRR. Then divide by your starting MRR and multiply by 100 to calculate the % NRR.
NRR = Starting MRR - Contraction MRR - Churn MRR + Expansion MRR / Starting MRR * 100
This can be a bit confusing because you may read about many different terms to describe the same thing. For example, some may say Starting MRR - Churn MRR + Expansion MRR equals the numerator. This is correct if Churn MRR includes downgrades.
I find it important to break out Contraction MRR to be able to distinguish between whether your customers are quitting your product versus contracting as a business due to external factors unrelated to the quality of your product.
NRR is also commonly referred to as Net Dollar Retention (NDR). Net dollar retention simply refers to what percentage of dollars you have at the end of the period from the customers you started with at the beginning of the period.
To answer the question “what is a good Net Revenue Retention rate in SaaS?” really depends on your competitive landscape.
NRR differs by industry vertical (e.g. sales tech vs. fin tech) and market segment (e.g. large accounts vs. SMB). The general rule of thumb that I’ve seen from Mark Roberge is the following:
100+% NRR is powerful because regardless of whether you bring in any net new customers, your business will grow. That’s what makes the SaaS business model so powerful. It has a compounding growth effect.
Understanding Net Revenue Retention is simple using the Sales Forecast Template. You can easily build a view of current MRR, Contraction MRR, Churn MRR and Expansion MRR.
Once you know how much money your customers are spending with you, you can calculate how much they will be worth long-term. This then gives you the ability to calculate how much you can spend on marketing channels to acquire new customers and drive growth.
The higher the NRR the more you can spend to acquire each customer. Whoever can spend the most to acquire a customer profitably can win the market.