Mar 29, 2023
Net Retention Rate (NRR)
Net Retention Rate (NRR) is a SaaS metric that measures the percentage of customers who not only renew their subscription with a company but also increase their usage and/or spend over a given period of time. It is an important metric as it helps companies understand how effectively they are retaining and expanding their customer base, and can also be used to predict future revenue growth.
What is Net Retention Rate
Net Retention Rate (NRR) is a metric that measures the percentage of customers who not only renew their subscription with a company but also increase their usage and/or spend over a given period of time. It is calculated by taking the revenue from existing customers at the end of a period and subtracting the revenue from those same customers at the beginning of the period, then dividing that number by the revenue from those same customers at the beginning of the period, and expressing the result as a percentage.
Why NRR is important
NRR is an important metric for several reasons:
It helps a company understand how effectively it is retaining and expanding its customer base. A high NRR indicates that a company is effectively retaining customers and that these customers are satisfied with the company's products or services, and are also willing to increase their usage and/or spend.
It can be used to predict future revenue growth. Studies have shown that companies with high NRR tend to have higher revenue growth rates than those with low NRR.
It can be used to inform business decisions such as product development, customer support, and sales and marketing efforts.
It's a more advanced metric than Gross Retention Rate (GRR) that takes into account if the customer increased its usage/spend, giving a better understanding of the customer's lifetime value.
How NRR is calculated
NRR is typically calculated by taking the revenue from existing customers at the end of a period and subtracting the revenue from those same customers at the beginning of the period, then dividing that number by the revenue from those same customers at the beginning of the period, and expressing the result as a percentage.
For example, if a company has $100,000 in revenue from existing customers at the beginning of a quarter, and at the end of the quarter that number increases to $110,000, the NRR for that quarter would be 10%.
It is worth noting that there are different ways to calculate NRR, depending on the period of time and the granularity of data. Some common variations of NRR are:
Annual Net Retention Rate (ANRR)
Monthly Net Retention Rate (MNRR)
Cohort-based Net Retention Rate (CNRR)
How to improve NRR
There are several ways that a company can improve its NRR:
Improving the product or service: One way to improve NRR is to improve the quality of the product or service. This can be done by incorporating customer feedback and making changes based on that feedback.
Offering upsells and cross-sells: Another way to improve NRR is to offer existing customers additional products or services that complement the ones they're currently using.
Providing better customer support: Providing better customer support can help to improve NRR by making it easier for customers to get help and by providing more personalized support.
Building a stronger brand: Building a stronger brand can help to improve NRR by making customers more likely to continue using a company's products or services and also increase their usage and/or spend.
Creating a better user experience: Creating a better user experience can help to improve NRR by making it easier for customers to use a company's products or services and by providing more value to them. This can be done by simplifying the user interface, providing more tutorials and guides, and making the experience more personalized.
Offering incentives for renewals and usage increase: Another way to improve NRR is to offer existing customers incentives for renewing their subscriptions and increasing their usage or spend. This can be done through loyalty programs, referral bonuses, or other promotions.
Why investor value high NRR growth
Investors value high NRR growth because it is a strong indicator of a company's ability to retain and expand its customer base, which in turn can lead to consistent and predictable revenue growth. Companies with high NRR tend to have higher revenue growth rates than those with low NRR, which makes them more attractive to investors. Additionally, a high NRR indicates that a company's customers are satisfied with the company's products or services and are willing to increase their usage and/or spend, which can lead to higher lifetime value for those customers.
How NRR relates with other SaaS metrics
NRR is closely related to other SaaS metrics such as Gross Retention Rate (GRR), Monthly Recurring Revenue (MRR), Customer Acquisition Cost (CAC), and Lifetime Value (LTV). NRR is an indicator of customer retention and expansion, while GRR is an indicator of customer retention alone. MRR, CAC, and LTV are all indicators of a company's financial performance. A high NRR, in combination with a high GRR, MRR, and LTV, and a low CAC, is a strong indicator of a company's overall health and potential for growth.
Sources
SaaS Capital article on "Net Retention Rate: A Key Metric for SaaS Success"
ProfitWell article on "The Importance of Net Retention Rate (NRR) for SaaS Companies"
ChartMogul article on "The SaaS Metrics That Matter"
Net Retention Rate (NRR)
Net Retention Rate (NRR) is a SaaS metric that measures the percentage of customers who not only renew their subscription with a company but also increase their usage and/or spend over a given period of time. It is an important metric as it helps companies understand how effectively they are retaining and expanding their customer base, and can also be used to predict future revenue growth.
What is Net Retention Rate
Net Retention Rate (NRR) is a metric that measures the percentage of customers who not only renew their subscription with a company but also increase their usage and/or spend over a given period of time. It is calculated by taking the revenue from existing customers at the end of a period and subtracting the revenue from those same customers at the beginning of the period, then dividing that number by the revenue from those same customers at the beginning of the period, and expressing the result as a percentage.
Why NRR is important
NRR is an important metric for several reasons:
It helps a company understand how effectively it is retaining and expanding its customer base. A high NRR indicates that a company is effectively retaining customers and that these customers are satisfied with the company's products or services, and are also willing to increase their usage and/or spend.
It can be used to predict future revenue growth. Studies have shown that companies with high NRR tend to have higher revenue growth rates than those with low NRR.
It can be used to inform business decisions such as product development, customer support, and sales and marketing efforts.
It's a more advanced metric than Gross Retention Rate (GRR) that takes into account if the customer increased its usage/spend, giving a better understanding of the customer's lifetime value.
How NRR is calculated
NRR is typically calculated by taking the revenue from existing customers at the end of a period and subtracting the revenue from those same customers at the beginning of the period, then dividing that number by the revenue from those same customers at the beginning of the period, and expressing the result as a percentage.
For example, if a company has $100,000 in revenue from existing customers at the beginning of a quarter, and at the end of the quarter that number increases to $110,000, the NRR for that quarter would be 10%.
It is worth noting that there are different ways to calculate NRR, depending on the period of time and the granularity of data. Some common variations of NRR are:
Annual Net Retention Rate (ANRR)
Monthly Net Retention Rate (MNRR)
Cohort-based Net Retention Rate (CNRR)
How to improve NRR
There are several ways that a company can improve its NRR:
Improving the product or service: One way to improve NRR is to improve the quality of the product or service. This can be done by incorporating customer feedback and making changes based on that feedback.
Offering upsells and cross-sells: Another way to improve NRR is to offer existing customers additional products or services that complement the ones they're currently using.
Providing better customer support: Providing better customer support can help to improve NRR by making it easier for customers to get help and by providing more personalized support.
Building a stronger brand: Building a stronger brand can help to improve NRR by making customers more likely to continue using a company's products or services and also increase their usage and/or spend.
Creating a better user experience: Creating a better user experience can help to improve NRR by making it easier for customers to use a company's products or services and by providing more value to them. This can be done by simplifying the user interface, providing more tutorials and guides, and making the experience more personalized.
Offering incentives for renewals and usage increase: Another way to improve NRR is to offer existing customers incentives for renewing their subscriptions and increasing their usage or spend. This can be done through loyalty programs, referral bonuses, or other promotions.
Why investor value high NRR growth
Investors value high NRR growth because it is a strong indicator of a company's ability to retain and expand its customer base, which in turn can lead to consistent and predictable revenue growth. Companies with high NRR tend to have higher revenue growth rates than those with low NRR, which makes them more attractive to investors. Additionally, a high NRR indicates that a company's customers are satisfied with the company's products or services and are willing to increase their usage and/or spend, which can lead to higher lifetime value for those customers.
How NRR relates with other SaaS metrics
NRR is closely related to other SaaS metrics such as Gross Retention Rate (GRR), Monthly Recurring Revenue (MRR), Customer Acquisition Cost (CAC), and Lifetime Value (LTV). NRR is an indicator of customer retention and expansion, while GRR is an indicator of customer retention alone. MRR, CAC, and LTV are all indicators of a company's financial performance. A high NRR, in combination with a high GRR, MRR, and LTV, and a low CAC, is a strong indicator of a company's overall health and potential for growth.
Sources
SaaS Capital article on "Net Retention Rate: A Key Metric for SaaS Success"
ProfitWell article on "The Importance of Net Retention Rate (NRR) for SaaS Companies"
ChartMogul article on "The SaaS Metrics That Matter"