If you’re in the SaaS market, you probably know that the main goal of most companies is to reduce churn, as it shows the sustainability of your organization. Currently, there are many metrics to track success, but the gold standard for SaaS companies is net revenue retention (NRR).
In today’s SaaS environment, customer choices matter, and churn can happen anytime because of many factors, including competition, pricing, functionality, or features. However, even though it would be ideal, we can’t have everything under control, so the best way to protect your business from such risks is to measure your company’s health accurately.
If you pay attention to important metrics, you can take corrective measures to ensure your company’s growth. But what is NRR? What is it used for? How can I calculate it? How can I improve the NRR of my company?
Today we’ll cover all these questions and more, including:
- What is net revenue retention (NRR)?
- How to calculate NRR in SaaS
- SaaS industry NRR benchmarks
- How to improve your NRR rate
- NRR vs. GRR
- The Net Revenue Retention Product Guide
Let’s dive in!
What is Net Revenue Retention (NRR)?
Net revenue retention (NRR) is a metric that companies use to evaluate the effectiveness of their marketing and sales efforts by measuring the recurring revenue generated from existing customers. The higher your NRR is, the less money you have to spend on ads to acquire new customers, which means your business is more profitable with less cost. It’s one of the most used metrics as it measures the overall impact on the revenue generation from your existing customers.
But why it’s so important? Due to the volatility of the current era, investors are increasingly focusing on sustainable growth instead of “growth at all costs”. To grow your SaaS business organically, you must retain your existing customers and grow with them. In this case, reporting your monthly recurring revenue (MRR) is not enough. And here is where net revenue retention comes into play.
Sometimes, high customer churn rates indicate that your product, pricing strategy, or customer experience may be failing. Measuring it through MRR can sometimes mask what’s really happening with your SaaS company. Instead, by measuring it with NRR, you can determine what kind of growth your company is experiencing or can achieve.
Wondering how to calculate it? Let’s explore it in the next section.
How to calculate NRR rate in SaaS
To calculate NRR, you need to add up the monthly recurring revenue (MRR) and the revenue generated through upgrades and cross-sells and then deduct the revenue lost from downgrades or churn. All of this then needs to be divided by the MRR. Let’s have a look at the correct formula:
NRR = ((MRR at the start of the month + expansion MRR) – (Churn MRR + contraction MRR)) ÷ (MRR start of the month) x 100
The result obtained will be a percentage over or under 100%. If it’s over 100%, it means you have a healthy business that can grow without acquiring new customers. If the NRR is below 100%, it means you need to improve your customer retention rate (CRR), as well as upsells and cross-sells.
SaaS industry NRR benchmarks
There are many companies in the SaaS industry, but only a few of them have amazing NRR benchmarks. Learn why and how some SaaS businesses achieved these results as we explore the best examples.
Slack – NRR of 143%
As you’ve probably already heard, Slack is a messaging program designed for the office that connects people with the information they need. They achieved $600M in ARR (annual recurring revenue) with a 143% net retention rate, and here is how:
- Freemium model: Did you know Slack has 80,000 paid users, and 500,000 use the tool for free? Their free version allows them to generate leads, but they convert to paying customers when using the free version.
- Low burn rate: A company’s burn rate is how it spends its initial capital. Thanks to Slack’s virality, the company only spends $97M a year. This means they have high profitability and benefits with an ARR of $600 M.
Zoom – NRR of 140%
Zoom is a cloud-based communication platform that offers video, voice, chat, and content sharing. They achieved $452 M in ARR with a 140% NRR. Here is how:
- Diversified clients: Zoom has different clients, from small companies with up to 10 workers to big customers with different workflows. It’s not limited to enterprises.
- Freemium is also a viable option for Zoom: The freemium model has helped the company to scale. 55% of the paying customers were initially on a free hosting plan.
- Annual billing: More than 74% of Zoom customers pay on an annual basis.
Hubspot – NRR of 100%
The HubSpot platform helps companies attract visitors, convert leads and retain customers using marketing, sales, and service tools. They achieved $1B in ARR with a 100% NRR. Here is how:
- Freemium also works for Hubspot: Did you know that 60% of Hubspot users still use the free version? Even though the company started offering freemium plans later, the free users are converting into paid ones.
- International growth: The company’s global market started with only 22% of its total market share. Currently, HubSpot is growing internationally by 44%.
How to improve your NRR rate
There are many ways to improve your NRR rate, but there are two key factors on which you need to focus: reducing churn rate by minimizing downgrades and cancellations and increasing expansion revenue through upsells, cross-sells, and add-ons. To do so, start by following these tips:
- Optimize the pricing: Align the pricing of your SaaS company to meet your NRR goals. Keep adding small updates and raising prices accordingly.
- Hire experts: Retention experts can help you improve your NRR. Improve your strategies and give a reason for your customers to stay with your company.
- Reduce customer churn: Enhance customer experiences and offer proactive customer support to satisfy your customer base and minimize downgrades or cancellations.
- Upselling: Increase your revenue by upgrading your product and selling it at a higher price.
- Offer customer onboarding: Reduce tickets, centralize customer communication, and improve product adoption by offering a complete customer onboarding experience.
While these strategies can help you increase your NRR, it’s crucial that you provide a consistent product and offer your customers all the tools they may need to value your business.
NRR vs. GRR
With so many technical terms in the SaaS industry, sometimes, NRR is confused with GRR. As mentioned above, NRR measures the total value of your renewed contracts and the revenue gained through upsells and cross-sells. Instead, GRR, or gross revenue retention, measures the ability to retain customers over a period of time.
The main difference between GRR and NRR is that GRR doesn’t include revenue earned from expansion, upselling, and cross-selling. It represents your success in retaining your existing clients.
Here you have how to calculate your GRR:
GRR = ((Monthly Recurring Revenue (MRR) at the start of the month–Churn–Downgrades) ÷ MRR at the start of the month)) x 100
The Net Revenue Retention Product Guide
We know metrics are complex and challenging to understand at first. However, they’re the only way to demonstrate if a business is healthy, growing organically, or achieving substantial growth.
Net revenue retention is one of the most important metrics as it shows the success or failure of your marketing and sales efforts; this makes it a good indicator of your company’s growth. The good news is that some strategies can help you achieve your NRR goals, such as hiring experts, optimizing your pricing, reducing churn, improving your onboarding process, and increasing upselling. It’s time to boost your NRR rate! Are you ready?
If you’re interested in learning more about net revenue retention, check our blog post SaaS Onboarding – Definitive Guide: Examples, Checklist & Metrics, and our FROGED retention features. Alternatively, book a demo with us today to learn more about how FROGED can help increase your SaaS’ NRR with proactive support and in-app behavioral triggers.