Getting new customers can be difficult and costly, so once you have done the hard work it's important to keep them. This is where net revenue retention comes into play.
So, what exactly is NRR?
It is the percentage of recurring revenue that a company manages to hold onto from its existing customers during a certain period (usually yearly) without taking into account the revenue from new customers.
NRR is an important metric in business as it gauges how well a company retains its customer base and boosts revenue from it over time.
NRR gives a peek into how sustainable and scalable a company's customer base really is. Given the array of metrics out there for businesses to track, why does NRR stand out?
This article breaks down how to compute NRR, why it's so important for companies to keep tabs on their NRR rate, along the challenges that crop up when analyzing it.
Understanding Net Revenue Retention
If your company's NRR is above 100%, you can be confident that your business is on the upswing. Revenues are stacking up year by year, making it appealing to investors. You don't have to stress about constantly chasing new sales to cover churn and you can trust that revenue from existing customers is steadily growing.
This means your company isn't solely dependent on acquiring new customers for growth and you are probably in a good place.
What is Considered a Good NRR Rate?
The best and most ideal NRR rate is over 100%. This means that not only are your existing customers staying and continuing to pay, but they are even paying more than before, usually through upsells. In this case it allows the company to focus on growth instead of having to invest efforts into reducing churn and keeping existing customers.
An NRR rate of 90-100% is also considered ok in many cases, but it depends on the industry and customer base.
A rate below 90% is usually not a good indicator, and below 80% is a big cause for alarm and needs to be fixed.
How to Calculate Net Revenue Retention
Here are three simple steps to calculate net revenue retention:
Compute the Annual Recurring Revenue (ARR) of a customer cohort from a previous period, usually for the past 12 months.
Determine the current ARR for that cohort.
Divide the current ARR by the ARR from the previous period and multiply the result by 100 to get your NRR percentage.
Net Revenue Retention Formula
Keep in mind that some companies and investors factor in price increases when calculating their Net Revenue Retention (NRR). As you learn to calculate NRR, it's crucial to understand the terms used in the formula:
The total annual recurring revenue = ARR
Revenue gained through subscription upgrades, including upsells and cross-sells by existing customers = Expansion ARR
Revenue lost from subscription downgrades = Contraction ARR
Revenue lost from subscription cancellations = Churn ARR
Let’s take the sample NRR of Timepro Company for a given period;
What are the Signs of a Good NRR?
Typically, a financially healthy company would aim for an NRR above 100%. If it's higher, the company is likely growing fast while being smart about finances compared to competitors with lower NRRs.
An NRR >100% means more Recurring Revenue from Existing Customers (Expansion), while <100% means less due to churn and downgrades (Contraction).
A company with an NRR of around 100% is seen positively, signaling it's on the right path.
The best companies can go well over 100% or even higher than 120%, but most aim for around 100%.
Therefore, the NRR of Timepro Company in the given example is 123.33%, which means it is growing by 23.33% even without acquiring new customers.
Simply put, a higher NRR indicates a company’s future looks secure, showing customers are getting enough value to stick around, and boosting NRR involves focusing on both future and current customers.