No – The founders, leaders and investors agree that NRR is now the “gold standard” when it comes to rapid and sustainable growth in SaaS.
How does NRR affect growth? It’s much easier to grow your company when you’re not losing revenue along the way. It’s even easier to grow your company when the amount your existing customers pay you increases over time.
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This is why retention is so important to growth and why senior managers and investors are watching it and watching it closely.
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Net Revenue Retention (NRR) is the percentage of recurring revenue retained from existing customers over a period of time. It measures how good your company is at renewing or retaining your existing customer base, as well as how good it is at generating additional revenue from those customers.
Any actions (or lack of actions) taken by current customers that change the amount of money coming into your company must be taken into account when calculating the NRR.
Is the amount of revenue your company is expected to have in the future. If you have 100 customers paying $1,000 each year, your annual recurring revenue is $100,000.
(NRR), on the other hand, is a retrospective metric that looks at how much of your recurring revenue you’ve kept over a period of time. For example, if you had 100 customers paying $1,000 each at the beginning of the year, then one customer was lost and two customers doubled their contract size, the ARR of $100,000 at the beginning of the year is now $101,000. End of the year, meaning NRR will be 101%.
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Net revenue retention (NRR) and net dollar retention (NDR) are very similar when used in the context of customer success. In fact, most CS practitioners use these terms interchangeably.
However, there are others who put their own unique spin on the definitions. For example, venture capitalist Seth Levin distinguishes between NDR and NRR as follows:
No matter how you slice it, net dollar retention is essentially the same as NRR (in the context of CS).
However, as CS organizations are increasingly influenced by revenue, you may want to use NRR as a more appropriate and accurate term. Let’s face it, “income” sounds better than “dollars”.
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While NRR and NDR are almost identical, NRR and gross revenue retention (GRR) are similar, but with one important difference.
Covers all recurring revenue in an account or group of accounts. This includes sales, additions, additional users, price increases, etc. including.
Includes additions and other income related to the expansion. It measures the annual revenue lost from the customer base, which is considered a more accurate metric for tracking customer health because attrition is not masked by growth and expansion to the extent that it is with NRR.
Net revenue rate measures dollar amounts, while customer retention rate (CRR) measures the number of customers or users a business retains over time.
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Some CS leaders view CRR as a true indicator of business performance because it is not affected by factors such as promotions, markdowns, price levels, add-ons, discounts or other transactions that can change retention rate numbers.
Your business needs a solid foundation to grow. An NRR rate above 100% means your income is growing year over year, which is generally positive.
Focus on customer success especially now. NRR, valuations, acquisitions, issuances, etc. It shows the stability and growth potential of your company, which are critical factors for them
“It’s no surprise that CS is in every boardroom today,” says Vas Natarajan, partner at venture capital firm Accel Partners. “For every board meeting I’ve had in the last six months, I’ve quickly increased the entire agenda. If I actually go through and look at the amount of air time given to customer success on those board agendas, it’s about 30-35%.”
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Because NRR is such a strong indicator of a company’s customer success experiences, investors use this metric to determine how much a business is worth.
“Net income capacity is the most important factor in determining company valuations,” Vas said. “The best performing companies with the highest valuations have excellent customer retention numbers.”
If the NRR is less than 100%, it means your company is relying on net new sales to offset this loss and increase company profits. If your NRR is above 100%, then your revenue increases, your valuation increases, and while of course net new sales are critical, there is less pressure on sales teams, which usually leads to a stronger funnel and customer base.
As you can see from the graph above, NRR has an exponential effect on the company’s annual growth. Even a 20% difference in NRR can be the difference in the long run between staying ahead of the pack or catching up.
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Once you have all your information, you can go ahead and apply it to the NRR formula.
(($MRR Value + $AR Value) – ($CR Value + $Current Accounts Value) / $MRR Value) x 100%
If you plug these numbers into the formula, you get an NRR of 71.67%. Note that this is an example
If this current trend continues and the NRR remains constant, after 3 years Company A will have an ARR of only $55,220 (not including net new sales) and Company B will have an ARR of approximately $130,000 (not including net new sales). sales). And remember, this is even though Company B started out with a lower ARR than Company A.
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Now, Company A may still be seen as a success even with such a low NRR because their sales force is driving a large number of new deals which hides the problem.
Company B, on the other hand, will see accelerated growth because its MRR will increase each month as new sales come in.
Since the net income ratio reflects your company’s growth potential, the target should be 100% or higher. So what base NRR rate can you refer to?
Klipfolio suggests that 90% is a good ratio for companies selling to SMEs, while Enterprise SaaS companies would do well to aim for a higher number.
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“Top tier companies can see NRR rates of 130% and above,” said Vas Natarajan. “Companies that reach these numbers are world-class organizations with great investment potential.”
Customer success plays a crucial role in your company’s net income retention numbers. After all, retention and updates are two of the primary responsibilities of a customer success department. Every customer CS saves, every extra seat they sell and every extra service they provide increases your NRR.
“Net income retention and customer success are intrinsically linked,” says Sidney Strader, CS Vice President. “Businesses can no longer deny or ignore customer success. CS is the central function that captures all the critical customer insights used to determine business strategy to optimize both retention and growth. Improving retention increases your growth potential.”
In the past, customer success was seen as a service that companies would only provide as an additional benefit to their largest and most important customers. Now it is far from that.
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“Customer success is not a cost center. It’s a profit center,” says Leona Leung, VP of Customer Experience at Coconut Software.
“Proof of this is that NRR is such an important topic to investors and the C-suite. Future businesses are investing heavily in their CS and CS Ops functions
Now that we’ve established how important net income retention is to a company, let’s see what we can do to improve it.
If you look at the formula, there are two ways to improve your net income retention:
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Sale. Your CSM and account managers play an important role in helping customers see the need for additional seats or features. They can make their case to EBR, detail all the reasons why the expansion is the right move, and then help the client get the most out of their investment.
Models. Mockups are essentially pop-up overlays used to highlight a call to action (CTA). You can use them in your app to encourage a user to upgrade (or sign up if they’re a trial user) when they try to access a feature that’s not available at their level.
In-app messaging. Remember Clippy, the animated clip from Microsoft Word? Imagine without the incredibly disgusting character. In-app contextual messages can appear on specific pages or when a user takes a certain action and invites them to upgrade.
However, it is important to remember that above all, the goal of the business should be to focus on expansion through value creation. Give customers enough value to add more space, buy another module, invest in integration, etc. It is not easy for them as they are sure to see a strong return on their additional investment.
Net Revenue Retention (nrr) For Saas: How To Measure & Improve It
Increasing retention and reducing losses are the more reliable of the two methods, as expansion returns are limited – per account
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