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Want to gain a deeper understanding as to the changes in your businesses’ recurring revenue? Here’s how to track Net Revenue Retention (NRR).

Net Revenue Retention (NRR)

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Net Revenue Retention (NRR) is used to measure recurring revenue from your existing customer base. It’s an important data point used to evaluate the sustainability of your business’ revenue.

A higher NRR indicates longevity and sustainability in your customer base. On the flip side, a lower NRR can indicate more customers are churning or downgrading, reflecting a leak in your retention strategy.

What is Net Revenue Retention (NRR)?

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Net Revenue Retention (NRR), otherwise known as Net Dollar Retention (NDR) is a metric used by SaaS companies to measure the percentage of recurring revenue generated from existing customers within a specific time frame.

The NRR metric includes expansion revenue, downgrades and customer churn to identify business growth opportunities from the existing customer base. NRR measures a company’s ability to retain and grow its customer base and is a commonly used metric to understand the health of SaaS businesses.

How to calculate NRR

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To calculate NRR you’ll need to know a few figures:

  • Monthly Recurring Revenue (MRR): how much recurring revenue you generate from existing customer subscriptions each month.
  • Expansion MRR: how much new revenue from upsells and cross-sells was brought in from existing customers.
  • Contraction MRR: how much revenue was lost from existing customers as a result of downgrades to lower-priced subscriptions and customers removing recurring add-ons to their subscriptions.
  • Churn MRR: how much revenue was lost as a result of customers churning or cancelling their subscriptions.

NRR Formula

What’s considered a good NRR?

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In general terms, an NRR over 100% indicates growth with a low churn rate and a stable customer base. Generally speaking, the higher the NRR, the stronger the revenue and customer base.

Anything above 120% is a strong NRR and shows a good level of growth. On the flip side, companies with an NRR below 100% should pay close attention to why customers are churning and contracting to improve their NRR.

The importance of NRR

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NRR is an essential metric for SaaS companies to understand the sustainability of their revenue growth. SaaS and subscription-based businesses need to retain their existing customers to grow and NRR provides a direct measure of how valuable your product or service is to your customer base.

A low NRR can indicate that existing customers aren’t satisfied with a company’s service and are churning out or downgrading as a result.

This provides SaaS businesses with an opportunity to invest in their customer retention strategies to keep customers around and grow the business.

Plus, investors can look to NRR to evaluate the health and sustainability of a business, and it is used as a key performance indicator (KPI) to measure how well the business retains its customers.

How NRR differs from Gross Revenue Retention (GRR)

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Gross Revenue Retention (GRR), otherwise known as Gross Dollar Retention (GDR) is another metric used to measure how the business retains customers. GRR calculates the total revenue (excluding expansion) minus revenue churn (including cancellations, downgrades, and expiring subscriptions).

While NRR and GRR are both measuring the revenue lost from your existing customer base, GRR doesn’t include any revenue generated from expansions like cross-sells and upsells.

Plus, GRR measures net revenue over time, while NRR measures net revenue over a specific time period. This means that GRR is often a more useful measure of long-term churn rates and revenue retention.

Tips for increasing NRR

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Increasing NRR is essential for SaaS businesses looking for long-term and sustainable revenue growth.

Customer retention strategies

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The main part of increasing NRR is reducing churn among customers. It’s a lot more expensive to acquire new customers than it is to retain them. There are plenty of ways SaaS companies can improve their customer retention and reduce churn but it starts with getting a good understanding of why customers are churning in the first place.

  • Create a smooth onboarding process: first impressions count, so you’ll want to make sure your customers have a smooth onboarding experience and reduce friction points to get the onboarding process done.
  • Enhance the user experience: frustration with user experience is one of the biggest reasons customers churn, so it’s important to keep investing and developing your platform’s user experience to improve customer retention and satisfaction.
  • Evaluate pricing structures: if customers are churning because your products or services are too expensive, it’s worth revisiting your pricing structures and better aligning the cost of your offerings with the value they provide.

Enhance upselling and cross-selling

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Looking to increase revenue from your existing customer base? Upselling and cross-selling are great ways to increase your NRR. Having a good understanding of your customers can help you better develop strategies to provide value to them through additional products and services.

The key is to increase your understanding of customers’ previous purchasing habits, needs and wants and subsequently deliver value to them from additional product features or premium versions of your product.

Improve customer support

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Customer support is essential to reducing churn rates by ensuring your customers are getting a positive customer experience with your business. This includes providing in-app support or live chat options where customers don’t have to wait hours to receive solutions to their problems.

Plus, having knowledge hubs on your website or app can provide additional support to customers so they can easily access solutions to their problems on their own.

NRR is one of the most essential and useful financial metrics used to measure recurring revenue from existing customers, ultimately evaluating the sustainability of a business.

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