Net Retention Rate (NRR)

What is it?

Net Retention Rate (NRR) is tracked by many and reported publicly by SaaS businesses. It analyzes the change in Annual Recurring Revenue (ARR) from a pool of customers over a period time (typically 1 year).

It answers the question, “If I didn’t add another customer, what would my revenue look like one year from now?”

NOTE: Net Retention Rate tells a holistic story, but to understand the drivers underneath and proactively action you should consider analyzing upsell, downsell, and churn. These drivers can be specifically actioned and will foot with NRR when calculated properly.

​How is it calculated?

Let’s say you have 10,000 customers as of December 2018 (aka the pool of customers) that generated $100,000 in ARR. When looking at that same pool 1 year later you have 8,500 remaining (1,500 churned) and those remaining generated $110,000 in ARR. Your NRR is 110%.

Why is it important?

NRR is a macro indicator that highlights your existing customers’ buying behavior.

Acquiring customers is expensive. Growing revenue from your existing customer base is much more profitable AND it proves what you offer is sticky and worth the price.

Given these facts companies that have high net retention rates will find it easier to raise capital.

What does good look like?

For established SaaS companies, a net retention rate over 120% is very good. Below 80% is not very good. Between 80 and 120% is considered stable.

Keep in mind you also need to consider the context of the business you are analyzing. If a business recently stopped selling a legacy product you may see a short-term drop in NRR. The opposite could be true if a new product was just launched and every existing customer was willing to purchase it right away.

​How do I improve this metric?

The simple answer is to sell your customers more stuff, protect your pricing, and keep your customers happy.

The practical things we have seen executed to drive the above are…

1. Upsell your existing customer base with products they have not purchased yet, you can do this by analyzing your whitespace.

2. Consider an annual pricing strategy tied to the development of extra features that your customers will benefit from.

3. Monitor Net Promoter Score to ensure customers are happy with your product and support.

4. Monitor customer usage of your product as a leading indicator for churn and downsell.

5. Ensure your Dev teams are focused on new products that can be sold to your base in the future.​

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