Imagine you are a product manager for an agile project management software and your revenue model is subscription-based. Let’s say that last month your revenue was $50,000 and this month your revenue is $60,000.
You might think that you had a 10 percent increase in revenue, but if you were asked how much revenue you retained from last month, or your overall net growth, you won’t be able to answer with the same number.
For you to answer this, you have to calculate the net revenue retention (NRR).
In this article, you will learn what NRR is, what the benefits of it are, and how to improve it to optimize the success of your product.
Table of contents
- What is net revenue retention (NRR)?
- How to calculate NRR
- Why is NRR an important metric?
- Benefits of NRR
- How to improve NRR
- Examples of NRR growth
- Difference between NRR and GRR
- Net revenue retention misconceptions
What is net revenue retention (NRR)?
Net revenue retention is a metric that helps to measure cumulative revenue retained from existing customers by examining revenue added due to expansions (upselling and cross selling) and contractions (downgrades and churns) for a given period.
NRR is one of the most important KPIs that companies track and evaluate to know the strength of the product in market, the sustainability of the business, and the net growth of the company.
Net revenue retention measures the ability of a company to retain its existing customers and increase revenue from them over time. It is an important metric that provides insight into the effectiveness of a company’s customer retention and upselling strategies.
How to calculate NRR
You can calculate NRR by using the following formula:
Net revenue retention is calculated by examining these four factors:
- Revenue at the beginning of month — The monthly recurring revenue (MRR) at the starting of month
- Expansions — Total revenue added by upgrades (upsells) and cross sells done for existing customers
- Contractions — Total revenue loss due to downgrades done for existing customers
- Churns — Total revenue loss due to subscription cancellations by existing customers
Imagine MRR was $50,000 at the beginning of the month and:
- Two customers canceled subscriptions, producing a loss of $2,000
- Two customers downgraded from premium to basic producing the loss of $1,000
- 12 customers upgraded from basic to premium adding $6,000 to the current MRR
Then we can calculate the net revenue retention as:
This finding means that the company retained 106 percent of its revenue even after certain customer exits and downgrades. Comparing this with the previous month’s retention rate also means that the business is capable of retaining 106 percent of its revenue month-to-month.
Let’s examine another example where the revenue at the beginning of month was $50,000, but several downgrades happened during the current month, resulting in a loss of $10,000 and a few customers canceled subscriptions resulting in loss of $5,000 more. One customer was cross-sold, adding $2,000 to the current MRR and the sales team couldn’t do any upsells for the current month.
In this case, the NRR would be:
This finds that the business was able to retain only 74 percent of its previous revenue.
Learn more →A net revenue retention rate of 100 percent means that a company retains all of its existing customers and generates the same amount of revenue from them in each period.
A rate above 100 percent indicates that the company is generating more revenue from its existing customers in the current period than in the previous period, due to upselling or cross-selling.
A rate below 100 percent indicates that the company is losing revenue from existing customers, either due to churn or a decrease in spending.
There are no standards for a good retention rate, although a business whose NRR is above 100 percent is performing as intended. A company that can retain 90 percent and above of its revenue month to month is generally considered stable and growth-driven.
Why is NRR an important metric?
It is easy to think that the more customers we acquire, the more revenue we generate, but businesses have to incur a price called customer acquisition cost on any new customer.
Acquiring a customer is 12 to 15 times costlier than retaining and upselling an existing customer. NRR helps a product manager and sales team focus more on retaining existing revenue and plan strategically on acquiring new revenue.
NRR helps in understanding whether your customers are happy with your product and services. The NRR signifies the strength you have in retaining and engaging customers.
Net revenue retention also helps in knowing whether your pricing strategy is efficient enough for you to generate sales.
NRR can be your key growth driver. Optimizing net revenue retention will help you to decide how much effort you should put into acquiring new customers versus retaining existing ones.
A product manager should track NRR to maintain overall customer success and develop healthy customer relationships to generate recurring revenue.
Benefits of NRR
There are numerous benefits to tracking NRR. Tracking NRR can help you:
- Measures customer loyalty — NRR is a key indicator of customer loyalty. A high NRR indicates that a company is retaining its existing customers and generating more revenue from them over time, which is a strong indicator of customer satisfaction and loyalty
- Identifies churn — By tracking NRR, businesses can identify customer churn. Churn can be a warning sign that customers are dissatisfied with the product or service, or that competitors are offering a more attractive alternative
- Drives expansion revenue — NRR can provide insights into expansion revenue. By understanding which customers are most likely to purchase additional products or services, businesses can target their marketing efforts more effectively and increase their expansion revenue
- Reduces customer acquisition costs — By retaining existing customers and generating more revenue from them over time, businesses can reduce their reliance on acquiring new customers, which can be costly and time-consuming. This can help to reduce customer acquisition costs and increase profitability
- Helps in strategic decision making to drive growth — NRR can provide insights into the reasons why customers are leaving or help understand how and when to acquire more customers. This information can be used to make strategic decisions on the product or service, process and operations, improve customer support, or adjust pricing strategies to reduce churn or increase volume
How to improve NRR
Businesses execute several strategies to improve their NRR depending on the products or services they offer or the situation/context the company/business is dealing with. There are few common strategies that companies can take to improve NRR as a whole:
- Focus on customer satisfaction
- Identify upsell and cross-sell opportunities
- Provide incentives for loyalty
- Invest in customer retention; Reduce churn
- Provide excellent customer support
Focus on customer satisfaction
The most important factor in retaining customers is ensuring that they are satisfied with your product or service. Providing exceptional customer experience can improve customer satisfaction and loyalty.
This can be achieved through personalized communication, timely response to customer inquiries, and consistent delivery of high-quality products and services. Companies can use customer feedback and surveys to identify areas for improvement and implement changes to enhance customer experience.
Identify upsell and cross-sell opportunities
Upselling and cross-selling can generate additional revenue from existing customers. Companies can identify upsell and cross-sell opportunities by analyzing customer data and behavior, understanding customer needs, and tailoring product or service offerings to meet those needs.
One of the most effective ways to increase revenue from existing customers is to offer them additional products or services that complement their existing purchases.
Provide incentives for loyalty
Loyalty programs can incentivize customers to stay with a company and make additional purchases. Companies can offer rewards, discounts, or exclusive access to products or services to customers who have been with the company for a certain period of time or have made a certain number of purchases.
Invest in customer retention; Reduce churn
Companies that prioritize customer retention are more likely to achieve a high net revenue retention rate. This can involve investing in customer service, marketing, and other strategies that help to keep customers engaged and satisfied over time. Churn can be reduced by addressing the reasons why customers leave.
Companies can analyze customer data to identify patterns and reasons for churn and implement strategies to address these issues. This can include improving product or service quality, providing better customer support, offering incentives for long-term contracts, and adjusting pricing strategies.
Provide excellent customer support
Providing excellent customer support can help retain customers and prevent churn. Companies can offer multiple channels for customer support, such as phone, email, and chat, and ensure that support is timely, knowledgeable, and helpful. Companies can also provide self-help resources, such as FAQs and tutorials, to help customers find solutions on their own.
Examples of NRR growth
Several companies have demonstrated success in achieving high net revenue retention (NRR) or improving their NRR. Here are some examples of companies and how they achieved high NRR:
Salesforce
In 2021, Salesforce reported an NRR of over 120 percent, indicating that its existing customers spent 24 percent more on its products than they did the previous year.
Salesforce achieved this high NRR by investing in customer success programs, providing excellent customer support, and regularly releasing new features and functionality to meet evolving customer needs.
HubSpot
HubSpot adapted its corporate strategy and reported an NRR of 107 percent in 2020. This indicated that its existing customers spent 7 percent more on its products than they did the previous year. Its NRR continued to improve as its 2021 Q2 earnings report showed NRR over 110 percent.
The company achieved this high NRR by focusing on customer success, providing extensive educational resources, and offering a flexible pricing model that allows customers to scale its usage as needed.
Zoom
Zoom worked to improve its NRR by focusing on customer satisfaction and retention. As a result, it reported an NRR of 130 percent, showing that existing customers spent 30 percent more on its products than they did the previous year.
Zoom improved its performance by providing an easy-to-use platform, offering excellent customer support, and regularly releasing new features and enhancements to meet changing customer needs.
Netflix
Netflix had a huge year in 2020. The company reported an NRR of 139 percent.
Netflix saw its NRR increase by providing personalized recommendations, regularly releasing new content, and offering a flexible pricing model that allows customers to choose from different subscription tiers.
Shopify
To improve its NRR, Shopify focused on customer success and providing value-added services.
According to Shopify’s Q2 2021 earnings report, its NRR was over 120 percent. Shopify achieved this by providing a user-friendly and reliable e-commerce platform, offering a range of value-added services, such as payment processing and shipping, and providing excellent customer support.
Slack
Slack reached a high NRR through a combination of customer-focused features and exceptional customer support.
The company can credit its recent success to its integration with other software, custom notifications, and collaboration tools that make it easy for teams to communicate and work together. Slack also keeps customers satisfied and loyal through its 24/7 customer support, including live chat and email.
Difference between NRR and GRR
To understand the difference between NRR and gross revenue retention (GRR), let’s look at how to calculate GRR:
As you can see above, NRR and GRR are both metrics used to measure customer retention and revenue growth, but they differ in how they calculate revenue and account for customer churn and expansion revenue.
GRR measures the total revenue generated from existing customers for a given period considering contractions (downgrades and churns), but without considering the expansions (upsells and cross sells). NRR, on the other hand, considers both revenue lost due to customer churn and revenue generated from existing customers through expansion opportunities.
Let’s calculate GRR for example above assuming MRR at the beginning of the month as $50,000 and:
- Two customers canceled subscriptions, producing a loss of $2,000
- Two customers downgraded from premium to basic producing the loss of $1,000
- 12 customers upgraded from basic to premium adding $6,000 to the current MRR
Our NRR for the above example was 106 percent and GRR is 94 percent. As GRR never considers upsells and cross sells, the GRR is always below 100 percent. Usually the closer the GRR is to 100 percent, the more likely a company is stable.
The key difference between NRR and GRR is that NRR accounts for both customer churn and expansion revenue, while GRR does not. This makes NRR a more accurate measure of customer retention and revenue growth, as it provides a more complete picture of how a company is performing and growing over time.
GRR can be a useful metric to track in conjunction with NRR, but it should not be relied on as the sole measure of customer retention and revenue growth.
Net revenue retention misconceptions
NRR is a potential indicator of business strength, however, there are few misconceptions PMs should avoid when using NRR to drive product success.
- High NRR always means the company is doing well — While high NRR is generally a positive indicator, it’s important to consider other factors such as customer acquisition, churn, and expansion revenue. A company with high NRR, but low customer acquisition may struggle to grow in the long term
- NRR only measures customer retention — NRR measures both customer retention and expansion revenue from existing customers. A company can have high NRR even if it’s losing some customers, as long as it’s generating enough additional revenue from existing customers
- NRR is only relevant for subscription-based businesses — While NRR is commonly used in subscription-based businesses and especially SaaS models, it can also be applied to other business models such as e-commerce. Any business that has repeat customers can use NRR to measure customer retention and expansion revenue
- High NRR means the company doesn’t need to focus on customer acquisition — While high NRR is a positive indicator, customer acquisition is still important for driving growth and expanding the customer base. A company with high NRR should use it to strategize on new customer acquisition
- NRR is a static metric that doesn’t change over time — NRR can change over time as customer behavior and market conditions change. It’s important to monitor NRR regularly and adjust strategies as needed to maintain or improve NRR
Summary
Net revenue retention (NRR) is a critical metric for measuring the effectiveness of a company’s customer retention and upselling strategies. Companies that prioritize customer satisfaction and invest in customer retention are more likely to achieve a high net revenue retention rate, which can be a key driver of growth and profitability over time.
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