Everything You Need To Know About Net Revenue Retention
One of the best things about the SaaS business model is its recurring revenue. When you win a new customer over, it won’t just be a one-time transaction. You can expect them to stick around and pay you month after month, or even year after year.
But of course, nothing is ever that simple. You still need to work hard to keep your existing customers happy and engaged, so they stay subscribed to your SaaS product for as long as possible.
And one of the best ways to measure your success in this area is net revenue retention (NRR).
In this article, we will talk about how you can calculate and improve your net revenue retention.
What Is Net Revenue Retention?
Your net revenue retention, also sometimes called net dollar retention (NDR), is a SaaS metric that measures the revenue you retain from your existing customer base over a given period of time.
How To Calculate Net Revenue Retention
To calculate your net revenue retention, you need to consider four things that affect your monthly recurring revenue (MRR):
- Starting MRR: Your MRR at the beginning of the month.
- Expansion MRR: Any new revenue you generate from upselling or cross-selling to your existing customers.
- Contraction MRR: Any lost revenue due to downgrades or cancellations.
- Churn MRR: Any lost revenue due to customers who cancel their subscriptions entirely.
To calculate your net NRR, add your starting MRR and your expansion MRR then subtract the contraction MRR and churn MRR.
This figure is your net NRR in terms of dollars (or whatever currency you’re using).
For example, let’s say your starting MRR was $10,000. You generated an additional $3000 from upsells and cross-sells (expansion) and lost $500 from downgrades and cancellations (contraction and churn).
This would give you a net NRR of $12,500.
However, if you’re comparing your company’s performance over time or stacking it against your competitors, having the NRR in terms of amount won’t cut it.
You’ll want to express it as a percentage.
That’s where the NRR rate comes in.
To find your NRR rate, simply divide your NRR by your starting MRR. In our example above, that would give you a 125% net revenue retention rate.
Net Revenue Retention Rate VS Gross Retention Rate: What’s The Difference?
If you’re familiar with the gross retention rate (GRR), you might think that the NRR rate seems to be the same as GRR.
Almost. But not quite. And it’s important not to confuse one with the other.
The difference between the two is that the gross retention rate doesn’t consider expansion MRR.
Tracking your GRR is a great idea if you’re trying to analyze the impact of your customer retention strategy.
On the other hand, NRR gives you a bigger picture of your cash flow. It includes not just your churn rate, but also any upsells or cross-sells that you’re able to make with your existing customer base.
Why Track Your Net Revenue Retention?
There are a few reasons why net revenue retention is such an important financial metric for SaaS businesses:
It Measures Your Customer Retention Capabilities
The biggest reason to track net revenue retention is that it gives you a clear picture of your ability to keep your customers and how it affects your bottom line.
If you see that your NRR is decreasing month after month, it’s a sign that you’re losing more revenue than you’re gaining. Or you’re relying on new customers to keep your SaaS company afloat.
And that’s not what the SaaS business model is designed for.
It Helps You Predict Future Growth
Your net revenue retention rate is also a good predictor of future revenue growth. If you have a high NRR, it means that you’re not only retaining your existing customers, but you’re also upselling and cross-selling to them effectively.
And that means more recurring revenue for your business in the future.
What Is A Good Net Revenue Retention Rate?
As a general rule of thumb, most successful SaaS companies aim for a net revenue retention rate of 100% or more.
That means they’re able to at least keep their existing customer base happy and engaged enough to prevent any net loss in MRR. Having an NRR of more than 100% means you’re successfully growing your recurring revenue.
However, the ideal NRR may vary depending on the composition of your target market and customer base. If you’re targeting small businesses, for example, your NRR might be lower than if you’re aiming for enterprise clients.
Let’s talk about specific numbers on net revenue retention benchmarks.
SaaS Companies Targeting SMBs: 90% or more
If you’re targeting small and medium businesses (SMBs) with your SaaS product, you should aim for an NRR rate of 90% or more.
Yes, we’ve established that all SaaS businesses across the board need to have an NRR rate of at least 100%.
But anything above 90% is still understandable given that SMBs have lower budgets and that their needs can easily change over time.
Still, that doesn’t mean you should relax. After all, an NRR rate of anything less than 100% still means that a lot of your customers are churning or downgrading their subscription plans.
You need to find out why this is happening and take steps to improve your net revenue retention rate as soon as possible.
Are customers leaving because they’re unhappy with your product? Are they finding a cheaper alternative? Are they having billing issues?
Once you know the reason, you can take steps to address the problem and prevent more customers from leaving.
SaaS Companies Targeting Enterprises: 120% or more
If you’re targeting larger enterprises with your SaaS product, you should aim for an NRR rate of 120% or more. That is actually considered excellent when it comes to the NRR.
Enterprise customers are generally willing to pay more for a high-quality product. They also tend to have longer commitment periods than SMBs.
So if you’re able to keep them happy and engaged, they’re likely to stay with you for the long haul. They might even upgrade their subscription plans as their needs change.
How To Improve Your Net Revenue Retention
Needless to say, improving your NRR generally revolves around increasing your customer retention rate and expansion MRR.
Let’s look at some specific ways you can do those things:
1) Provide Top Notch Customer Support
Customer support is one of the most important things when it comes to reducing customer churn and improving customer retention.
There are quite a lot of ways you can make sure that you’re giving the best customer service possible. Here are some pointers you can start with:
Build An Intuitive Knowledge Base: Your first goal is to make sure that your customers can easily find answers to their questions without having to contact support.
That way, they don’t have to wait around for a response and they’re more likely to be satisfied with your product.
Fill your knowledge base with helpful articles, how-tos, and FAQs. Make sure that the articles are well-written and easy to understand.
And most importantly, design your knowledge base in a way that’s easy to navigate. Allow customers to search for specific topics or browse through articles by category.
Make It Easy To Contact Your Customer Service Team: Some customers will still need to contact support even if you have a great knowledge base.
So make it easy for them to do so by providing different channels they can use, such as live chat, email, or phone. And make sure that someone is always available to respond to their queries.
Provide Prompt And Helpful Responses: When customers do reach out, make sure to respond as quickly as possible
The goal is to resolve their issues before they even have a chance to get frustrated. So aim for a response time of less than an hour for live chat and 24 hours for email.
And of course, provide helpful and courteous responses. Take the time to understand their problem and offer a solution that actually addresses it.
2) Provide Helpful Customer Success Services
Customer success services are a great way to keep your users happy and engaged with your product. After all, customer success is about helping them make the most out of your SaaS product and achieve their goals.
Here are some ways you can provide the best customer success service:
Know Your Customers’ Goals: The first step is to understand what your customers are trying to achieve with your SaaS product.
What specific goals do they want to accomplish? What challenges are they facing? Once you know the answers to these questions, you can tailor your customer success services accordingly.
Provide Onboarding And Training: Once you know your customers’ goals, you can help them achieve those goals by providing onboarding and training.
This will ensure that they know how to use your product effectively and get the most out of it. You can provide this service in the form of live sessions, webinars, or even one-on-one calls.
Just make sure that the training is tailored to their specific needs and goals.
Monitor Their Usage And Engagement: It’s also important to keep track of how your customers are using your SaaS product.
Are they using it as intended? Are they struggling with anything? What features are they using the most? This information can be gleaned from usage data and engagement metrics.
Based on this data, you can reach out to customers proactively and offer help when needed. You can even make suggestions on how they can use your SaaS product more effectively.
3) Create A Winning Upsell Strategy
Upselling is a great way to boost your expansion MRR and overall revenue. After all, it’s easier to sell to existing customers than it is to find new ones.
But of course, you can’t just offer any old upgrade or additional service and expect customers to bite. You need to have a well-thought-out upsell strategy.
Here are some tips on how to create a winning upsell strategy:
Make Offers Based On Upsell Triggers: First, you need to identify when and why customers would want to upgrade their subscription or buy an additional service.
For example, if your SaaS product is a CRM tool, then a trigger could be when a current customer reaches a certain number of contacts in their database.
Or if you offer a project management tool, then a trigger could be when a customer creates a certain number of projects.
The key is to identify the triggers that are most likely to result in an upsell.
Offer Free Temporary Upgrades: Another way to increase the chances of a successful upsell is to offer free upgrades that last for a month or two.
For example, if you offer a CRM tool with different subscription tiers, you could offer a free upgrade to a higher tier when a customer reaches a certain number of contacts in their database.
This is a great way to show customers the value of upgrading without putting any pressure on them. And when the free upgrade expires, they will be more likely to switch to the higher plan permanently.
Make It Easy To Upgrade: Finally, you need to make it as easy as possible for customers to upgrade their subscriptions or buy an additional service.
The last thing you want is for them to get frustrated and give up. So make sure the process is simple and straightforward.
For example, you could include an upsell offer on the customer’s dashboard or in their account settings. Or you could send them an email when they reach a certain trigger point.
All they need to do is click a button. No long talks with your customer support team.
By following these tips, you can create a successful upsell strategy that will help you boost your expansion MRR.
4) Track And Improve Retention Metrics
Last but not least, you need to track your retention metrics and continually strive to improve them
Here are some retention metrics you need to track:
Net Promoter Score (NPS): The net promoter score is a metric that measures customer satisfaction.
It’s based on a simple question: How likely are you to recommend our product to a friend or colleague?
Customers can answer on a scale of 0 to 10, with 0 being “not at all likely” and 10 being “extremely likely.”
Based on their answer, customers can be classified as Promoters (9 to 10), Passives (7 to 8), or Detractors (0 to 6).
You can then calculate your NPS by subtracting the percentage of detractors from the percentage of promoters.
Generally, an NPS of 30 or more means that your customers are happy with your product. If you get a rating below 0, though, you need to work on improving customer satisfaction.
Customer Engagement Score (CES): The customer engagement score is a metric that measures how engaged your customers are with your SaaS product.
There are many factors that contribute to customer engagement, such as how often they use your product, how long they spend using it, etc.
To track it, you would have to assign various importance values to different customer engagement events.
For example, let’s say you have a CRM solution. Adding a new contact could have a value of 1. Creating a custom pipeline could have a value of 5. And successfully closing a deal could have a value of 10.
Then a customer manages to build 1 custom pipeline, add 100 contacts, and close 50 deals within a month. Their customer engagement score would be (1 x 100) + (5 x 1) + (10 x 50) = 605.
You can compare CES between different customers to see how they are doing. You can segment them based on their CES and take specific actions per segment.
A high CES score means that customers are deeply engaged with your product. If the score is low, though, it could mean that they are struggling to use it or that they don’t see the value in it.
Final Thoughts About Net Revenue Retention
Net revenue retention is a key metric for any SaaS business.
It’s a measure of how much recurring revenue you’re able to generate from your existing customer base. And it’s a good indicator of long-term growth potential.
But more than just calculating it, you also need to take the right action to improve it.
What’s more, you also need to track other metrics, such as customer acquisition cost (CAC) and customer lifetime value (CLV), to get a more holistic view of your SaaS company’s health.
By tracking net revenue retention, customer engagement, and other sales metrics, you can make sure that your SaaS business is on the right track.
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