SaaS Companies: You Can't Ignore NRR Anymore, Here's Why

By Gabriel Birky Pohirieth
Published: 6/14/22
definition backgroundSaaS Companies: You Can't Ignore NRR Anymore, Here's Why

If you work in SaaS, you've probably already heard of NRR (net revenue retention).

Let's face it, this metric is increasingly used by companies that operate with a recurring business model, to the point that it is becoming absolutely essential.

So, if it isn't yet an integral part of your dashboards, we'll explain everything about NRR, how to calculate it, and interpret it. You'll soon understand why it is essential to monitor and how to improve it to boost your revenues in the long term.

Benoit Parra, Account Executive at Planhat, knows this indicator well since he tracks it with his clients. He'll share his vision of NRR with us throughout the article.

What is NRR?

NRR (net retention revenue) is a strategic metric that measures the revenue generated by your existing customer base over a given period of time, excluding acquisition-related revenue.

It provides a true picture of a company's ability to:

  • generate additional revenue in a healthy way without going out and prospecting,
  • satisfy and retain customers to the point where they are willing to spend more.

This net retention rate will give an accurate view of the future revenue that will continue to be generated, because it takes into account the loss of revenue due to canceled subscriptions (churn) or downscaling, which is not done by single metrics like MRR, for example.

How to calculate NRR?

To be able to calculate your NRR, you must have calculated a couple of indicators beforehand:

  • the MRR at the beginning of the period (or ARR if you're using a year as your reference period),
  • Additional revenue generated (cross-selling, up-selling, etc.)
  • Lost revenue (downgrades, churn, etc.)

The NRR formula is as follows:

     ((MRR + additional revenue - lost revenue) / MRR) x 100 = NRR

Let's use an example to illustrate. Here are the indicators for company A:

  • MRR: $200,000
  • Additional revenue (Expansion MRR): Upsells, cross-sells, and add-ons: $10,000
  • Lost revenue (Downgrade MRR, Churn MRR, etc.): $4,000

Its NRR will be:

     ($200,000 + $10,000 - $4,000) / $200 000 = 1.03 x 100 = 103%

Now, how do we interpret the result? Is it positive or negative?

Expert Thoughts

If you don't have enough data or insights to calculate your NRR right away, it can be useful to calculate the average time it takes for a customer to become profitable.

Benoit Parra

Benoit Parra, Account Executive at Planhat

What is a good NRR?

An NRR above 100% shows that your company:

  • knows how to retain and gain its customers' loyalty;
  • has a good capacity to grow its revenue without prospecting.

Now, this indicator should always be interpreted according to the type of customers you have.

As you know, churn is always much higher on small and medium accounts that have more leeway to change tools, while large accounts sign more long-term contracts and have less flexibility to leave.

With that in mind:

  • a 90% NRR with a majority of small customers can be considered a good rate,
  • a good NRR would be 125% for a SaaS company that only signs large accounts.

Why Net Retention Revenue has become an essential indicator

Background

The NRR metric appeared in the subscription world for a good reason.

This business model means that the company enters into a recurring and ideally long-term relationship with each new customer.

There is more and more talk of NRR, as many SaaS companies or more traditional sectors are switching to and using this recurring business model.

A good NRR boosts revenue in the long term

As soon as your NRR is above 100%, your ARR will increase exponentially over time. And the higher it is, the more powerful this effect will be!

The graph below shows the difference in revenue over the long term between a 95% NRR and a 105% NRR:

Net Revenue Retention's Impact on Growth© HockeyStack

There is a cumulative effect, which can go up to 52% of the income after 5 years, for an NRR of 105%.

It maximizes the company's value

When raising capital, investors evaluate the company to determine its value and therefore its potential return on investment.

Of course, they rely on traditional financial indicators, but the NRR rate is becoming one of the main metrics for valuing a company. It shows that you know how to create value with your existing customer base and that you know the ways to continue to generate value. It used to be that the ability to generate new customers was valued more, but that model has become less compelling.

Expert Thoughts

As proof that the NRR is very much looked at by investors, know that companies with an NRR between 100% and 110% are valued on average at 9 times their ARR, and those above 120% are valued at 21 times their ARR.

Benoit Parra

Benoit Parra, Account Executive at Planhat

It gives a competitive advantage

For SaaS and subscription players, this is the most important metric to show a healthy business and the ability to grow exponentially, without dependence on acquisition.

Expert Thoughts

Competition in the markets is getting tougher and tougher and is driving acquisition costs through the roof. It is, therefore, more advantageous and less expensive to increase the potential of existing customers than to prospect for new ones.

Benoit Parra

Benoit Parra, Account Executive at Planhat

The important role of the CSM (Customer Success Manager)

The NRR metric has emerged in a context where the subscription market has changed the way of seeing and understanding the customer relationship.

Being in a recurring industry means that the customer relationship no longer ends at the time of purchase, but begins at that point. The goal of the game is to then prepare yourself to keep the customer as long as possible in order to generate maximum value.

Expert Thoughts

The Client Success department is essential. It should no longer be seen as a cost center, but as an investment to generate growth. It's important to understand that everything starts after the signature, and that is when the money is best invested.

Benoit Parra

Benoit Parra, Account Executive at Planhat

Retaining customers by ensuring their satisfaction and getting them to continue their subscription is one of the missions that Customer Success Managers must perform. An essential part of your turnover and NRR depends on this role!

Every customer saved or every additional sale can tip the balance.

Expert Thoughts

CSMs must be allowed to do what they were hired to do 100% of the time. They need to position themselves as strategic partners to their customers, not as VIP support. They need to take into account the specific needs of each client and help them thrive. Focusing on customer outcomes beyond the filter of your software is key.

Benoit Parra

Benoit Parra, Account Executive at Planhat

How do you make your NRR skyrocket?

The two main levers to improve your NRR are:

  • limiting revenue losses due to churn and downgrades,
  • increasing additional sales to your customer base.

Have an easily “upsellable” product or service

The pricing strategies of some SaaS companies mean that upsells will occur organically. This is the case when billing is done by the number of seats or the number of customers, variables that will tend to grow with the company and increase your revenue.

Otherwise, you will have to work on your different offers and packages to offer coherent upsell levers to your CSMs.

Expert Thoughts

An upsell is done when you have already delivered value and you have a good understanding of your customer's important issues. It’s almost unthinkable to upsell as long as a relationship of trust hasn't been established, and no value has been generated.

Benoit Parra

Benoit Parra, Account Executive at Planhat

Fine-tune the customer onboarding process

Your prospect is convinced by your offer and has completed their first purchase… Now, the onboarding phase begins.

So, what’s the main challenge? Make sure that the customer doesn't cancel their subscription next month by:

  • making sure that they understand the tool and get used to it,
  • laying the foundations for a relationship of trust,
  • showing that the tool keeps its promises with initial results.

On your end, this is the ideal time to ask as many questions as possible and to take an interest in their pain points and their short, medium, and long-term objectives, in order to better help them achieve them.

Setting up a well-oiled onboarding process is the key to gaining time and efficiency!

Expert Thoughts

The biggest danger zone for churn is the onboarding phase. You can quickly lose a customer if this phase is slow, tedious, and not focused enough on the customers and their problems. A good practice is to focus on use cases related to the customer's objectives, rather than on features.

Benoit Parra

Benoit Parra, Account Executive at Planhat

Set up periodic client performance reviews

The client’s performance review is a meeting that allows you to review with your customers:

  • the progress made since your partnership started,
  • their satisfaction with your product or service,
  • their expectations and any obstacles encountered,
  • their potential dissatisfactions,
  • their objectives for the next few months, etc.

The priority will be to detect any roadblocks and to provide concrete solutions through advice.

This is the ideal moment to understand the customer even better and to open up new perspectives by showing them short or medium-term projections with an additional service or an upgrade. In short, the basis to start developing the framework for a long-term relationship and trigger additional sales.

Expert Thoughts

The objective should not be to know how well clients pick up the platform, because that is not what generates revenue. Positive feedback or a good NPS is great, but it's not enough. The most important thing is to be able to link an increase in customer revenue to their use of your platform, which demonstrates the value of the partnership.

Benoit Parra

Benoit Parra, Account Executive at Planhat

Regularly review the profile of your ideal customer

Is your churn not decreasing or even increasing despite your efforts? Then you may have a targeting problem.

Defining your buyer persona, your ideal target customer, is not a process that is set in stone and it can be useful to re-evaluate it regularly, especially if :

Sometimes it's as simple as that! Continuing to make marketing and sales efforts aimed at the wrong people is a waste of time and money. Sit down every 3 to 6 months to reorient or refine the profile of your ideal customer, so that you can gradually gain efficiency and deliver offers that will satisfy them.

To do this, it is a good idea to use a customer success platform to gather valuable data on your customers, which can be accessed by all departments in the company.

Expert Thoughts

First and foremost, don't underestimate the importance of good lead qualification. You have to make sure that you can help your customers, otherwise, you will experience time-consuming and inefficient onboarding processes, which will sooner or later lead to churn because the tool isn't adapted to their problems. Beyond wasting time, you run the risk of disappointing customers and causing negative repercussions on your reputation. Sometimes you have to know how to refuse a sale for the good of the company.

Benoit Parra

Benoit Parra, Account Executive at Planhat

So, are you convinced by the importance of tracking your NRR?

Transparency is an essential value for Appvizer. As a media, we strive to provide readers with useful quality content while allowing Appvizer to earn revenue from this content. Thus, we invite you to discover our compensation system.   Learn more
Definition backgroundEverything You Should Know About the SaaS Contract
Definition
July 7, 2022
Everything You Should Know About the SaaS Contract
What is a SaaS contract and how does it differ from a standard software contract? What are the points to be aware of before drafting or signing one? As with any contract negotiation, it is important to anticipate!
Tip backgroundInternational SaaS Strategy- Do's and Don'ts
Tip
October 4, 2021
International SaaS Strategy: Do's and Don'ts
Deciding to move your SaaS startup can be a hard and demanding task. Are you looking to take your business to the next level? Take some time out of your day and find out the answers to these questions and steps your SaaS startup has to take to move towards a successful and profit producing global expansion.
Definition backgroundWhat Is SaaS as a Part of Cloud Computing?
Definition
December 24, 2020
What Is SaaS as a Part of Cloud Computing?
SaaS, or Software as a Service, is a model for making software and applications available remotely, via the cloud service. Examples and advantages.