What Is NRR SaaS: How To Calculate & Improve Your Net Revenue Retention
What makes the SaaS business model such a lucrative venture is its ability to drive recurring revenue.
With it, your customers don’t just pay one time. But instead, they keep paying you every month or every year.
But this business model also poses some challenges in terms of customer retention. To be really successful as a SaaS company, you need to retain your customers for as long as possible.
One of the SaaS metrics that help you monitor customer retention and how it affects your bottom line is net revenue retention (NRR).
It measures how much of your existing customers’ payments are retained over time.
In this article, we will look at a brief overview of what NRR is in SaaS and what you can do to improve it.
What Is NRR In SaaS?
Net revenue retention rate, also known as net dollar retention, is a metric used to measure the percentage of recurring revenue that you retain from your existing customer from one period (usually a month) to the next.
However, notice that the word “net” is there. This means it also considers other possible changes in your recurring revenue.
And that brings us to our next point of conversation.
What Net Revenue Retention Considers
Calculating your NRR rate requires you to monitor your monthly recurring revenue (MRR) and other related factors that can affect it.
This includes the following:
Your existing MRR is the monthly revenue that you have from your existing customer base at the start of the month.
In order to get a solid view of your MRR, you need to make sure that you have an accurate list of your existing customers and what they’re paying you. If you have annual plans or multi-year deals, you will also need to break them down to what you get from them monthly.
Expansion MRR is the additional revenue you get from your existing customers due to upselling and cross-selling.
In the context of SaaS, upselling is when you get an existing customer to upgrade their subscription plan.
If you have a tier-based pricing model, upselling is getting them to upgrade their current plan to a more advanced plan. If you have a usage-based pricing model, it can also refer to getting them to increase their usage limits.
On the other hand, SaaS cross-selling is when you get an existing customer to buy an additional SaaS product or service.
For example, let’s say you have a customer relationship management (CRM) platform. But you also separately offer a voice over internet protocol (VoIP) solution that seamlessly integrates with your CRM. Cross-selling would be getting a CRM customer to also purchase the VoIP solution.
Contraction MRR is what you lose due to downgrades and cancellations from your existing customers.
Again, if you have a tier-based pricing model, it can refer to when an existing customer downgrades their subscription plan from a more advanced one to a less advanced (and cheaper) one. In usage-based models, it can mean reducing their usage limits/amount.
Churn MRR is what you lose when an existing customer cancels their subscription completely and no longer pays you.
Therefore, it’s important to monitor this metric closely as it has a significant negative impact on the MRR that you retain over time.
How To Calculate Your Net Revenue Retention Rate
To find your net dollar retention, you need to consider all the factors mentioned above.
To calculate it, add your existing MRR and expansion MRR then subtract your churn MRR and contraction MRR. Divide the resulting number by your existing MRR.
For example, let’s say that at the start of the month, you have an existing MRR of $100,000 and get an expansion MRR of $30,000. But, you experience a churn MRR of $7,000 and contraction MRR of $3,000.
The computation will be as follows
($100,000 + $30,000 – $7,000 -$3,000) / 100,00 = 120%
That gives you an NRR rate of 120%. That means that thanks to your upselling and cross-selling efforts, you have managed to exceed last month’s MRR by 20% despite churn and contraction.
Generally speaking, you should aim for an NRR rate above 100%. Still, the industry benchmark depends on the composition of your customer base.
A net revenue retention rate of 90% is considered to be acceptable for SaaS companies that cater to small and medium-sized businesses.
However, if your existing customer base is made up of large enterprises, the bar is raised at 120%.
Net Revenue Retention VS Gross Revenue Retention
Where there is a “net”, there is also a “gross.” Anyone who pays their taxes knows this all too well.
And if there is net revenue retention, there is also gross revenue retention (GRR). It’s important that you do not confuse the two with each other.
As we mentioned above, net dollar retention takes into account both possible additions and deductions to your monthly recurring revenue. Whereas GRR only considers the deductions (churn MRR and contraction MRR).
So to calculate your GRR, subtract the churn and contraction MRRs from the existing MRR then divide it by your existing MRR.
Let’s take our example above. Imagine that you have an existing MRR of $100,000, a churn MRR of $7,000, and a contraction MRR of $3,000.
The calculation for your GRR would be as follows:
($100,000 – $7,000 -$3,000) / 100,00 = 90%.
Gross revenue retention is a useful metric to track when you’re looking to measure what effect churn has on your business.
However, it should not be used to measure the overall success of your customer retention strategies as it doesn’t take into account any expansion MRR that you might have gained from upselling and cross-selling.
That’s why net revenue retention is usually the more comprehensive metric to focus on when assessing the success of your efforts.
How To Increase Your Net Revenue Retention Rate
Increasing your NRR rate is essential for your SaaS company as it has a direct effect on the growth of your business.
Here are some ways that you can increase your net revenue retention rate:
Focus On Customer Success
Customer success is all about helping your customers achieve their desired outcomes with the help of your SaaS product. It’s about ensuring that they get the most out of what you offer regardless of what plan they choose.
Here are some tips on how you can do this:
Provide A Thorough Customer Onboarding Process: Make sure that all your customers are provided with the necessary resources to get onboarded quickly and effectively. Provide them with an easy-to-follow onboarding program and tutorial videos to help them get started.
Monitor Usage Data: This will help you identify what parts of your SaaS your customers are using, what they’re not using, what they’re struggling with, and what they need to do more in order to get the most out of it.
In turn, this data can help you personalize the help and advice you offer to them.
Be Proactive: Keep an eye on what your customers are doing and reach out to them when needed. Offer assistance and advice when they’re facing a problem or have questions about how to use the product better.
Provide Regular Training Opportunities: Invest in webinars and training programs that will help your customers stay up-to-date with industry best practices and new features. This will help ensure that they don’t get stuck in a rut and find themselves unable to take advantage of what you offer.
Make Sure Your Customer Support Team Is Responsive & Helpful
If you’re looking to reduce customer churn and improve customer retention, having a responsive and helpful customer support team is key.
Here are a few tips to get you started:
Give Your Support Team Proper Training: You should make sure that your customer service reps are properly trained and equipped to handle any customer issue quickly and efficiently. Prompt and helpful responses to customer inquiries can go a long way in building loyalty and trust.
Automate Your Support Processes: You should also employ strategies like live chat, automated responses, and customer self-service portals so customers can get the help they need when they need it.
If you’re considering using AI assistants like chatbots, though, you need to be careful about it.
Sure, it can make your support process faster for common issues. But if (or when) it fails to give a proper response to more complex concerns, it can cause frustration among your customers.
So use this technology responsibly and make sure that you provide your customers with options to talk directly to a human whenever they need to.
Track Your Customer Support Metrics: To measure and improve your customer support team’s performance, you need to track and analyze the right customer support metrics. These can include response time, first call resolution (FCR) rate, and conversation volume.
These will help you identify what areas of your support process need improvement so that you can focus on the right areas.
Listen To Your Customers
To really know what your customers need, you should actively collect feedback from them. Ask them what they would like to see improved or what features they find most useful.
Here are a few ways you can do this:
Send Surveys To Your Customers: You can send surveys to your customers asking them what they like and what they don’t. This will help you find out what’s working or what areas need improvement.
Even better, you can send them a customer satisfaction (CSAT) survey or a Net Promoter Score (NPS) survey. These types of surveys can quantify how your customers feel about your SaaS product.
What’s more, with the right follow-up questions, you can learn the specific reasons why they either love or don’t like what you offer.
Make sure to read through all the reviews and take note of what people are saying, both good and bad. This will help you identify what works well from a customer perspective and what doesn’t.
This is important information if you want to improve your net revenue retention rate in SaaS. After all, it’s only when customers are happy with what they get that they’ll keep coming back for more.
Set Up An Online Forum: You can also set up an online forum or discussion board where customers can share ideas, feedback, and solutions with each other. This provides a platform for your customers to connect with each other and develop their own relationships as well.
Supercharge Your Upsell Strategy
Improving your net revenue retention isn’t just about reducing churn. It’s also about increasing the expansion revenue you get from your existing customer base
You can do this by offering upgrades and add-on SaaS products to your current customers. This is a great way to get them to spend more on what you offer and increase the total amount of revenue they bring in over time.
To make sure you’re doing it right, here are a few tips:
Tailor Your Upsell and Cross-Sell Offers Based On Usage: You should tailor your upsell and cross-sell offers based on what features your customers are already using. That way, you can suggest relevant products or upgrades that make sense for them.
Create A Self-Service Upgrade Portal: Make sure you have a self-service portal or dashboard where customers can easily upgrade their plans or add new products. This will make it easy for them to do what they need without having to contact a customer success manager.
Offer A Temporary Free Upgrade: One effective way to get a current customer to upgrade to a higher plan is to let them experience how it is to have the additional features.
You can do this by offering a free upgrade for a limited amount of time. This will let them try out the new features and make them more likely to commit in the long run.
What Is NRR SaaS: Final Thoughts
Net revenue retention rate (NRR) in SaaS is an important metric to track. It measures the amount of revenue you’re able to retain from existing customers over time.
However, it doesn’t tell you much about what needs to be improved or what features customers like. To really get a handle on what’s working and what isn’t, you need to track other customer retention metrics, such as Net Promoter Score, churn rate, and many more.
Finally, always remember that revenue growth isn’t just about getting new customers and reducing customer churn.
It’s also about increasing the amount of revenue you’re getting from each customer. To do that, you need to beef up your upsell and cross-sell strategy as well.
Want more guides to help you grow your SaaS business? Check out our blog here.