Net Revenue Retention (NRR) in SaaS: Strategies for Long-Term Revenue Growth

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.

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.

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?

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.

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.

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:

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

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.

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.

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.

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.

The two main levers to improve your NRR are:

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

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.

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!

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.

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 :

• you have moved upmarket,
• you have changed your offers, etc.

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.

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