A major shift in the distribution model of software meant that SaaS metrics needed to evolve. The concepts have changed, the key performance indicators (KPIs) have changed and now you have to change with them. We will be discussing all Net Revenue Retention in this blog.
What is Net Revenue Retention?
If you are a SaaS business, churn is your devil with the pitchfork. Customers are unsteady, they sometimes run off to your competitors. Especially because the switching costs are much cheaper now. But SaaS leaders know the importance of Net Revenue Retention and tracking it.
NRR is the most widely used customer success metric. It is an indicator of growth for SaaS businesses. Net revenue retention is the impact your current customer has on your revenue. Existing customers impact the revenue in these ways:
- The customer churns and you lose their revenue
- The customer downgrades
- If the customer upgrades
- The customer purchases a new product
The customer’s decision directly affects your revenue. When you take into account all these changes with your existing customers and your recurring revenue, what you get is the net revenue retention.
Calculating Net Revenue Retention
Net revenue retention has a simple formula that only needs 4 variables. It is as follows:
- Your monthly recurring revenue of the month (a)
- Revenue through upsells and cross-sells (b)
- Revenue lost due to downgrades (c)
- Churned Revenue (d)
The formula becomes:
NRR = (a + b – c – d) / a
If you have a company that has an MRR of $10,000. Your upsell revenue for the month is $1000. You lose $1000 to downgrades and $2000 in churned revenue. Your net revenue retention will come out to be:
NRR = (10000 + 1000 – 2000 – 1000) / 10000 = 80%
This means that your company is losing net revenue due to high churn and downgrading. If you are above 100% then you would achieve the golden benchmark net negative churn. As a SaaS business, you should always try to achieve net negative churn.
Additional Read: 7 data points that drive retention
What Does Net Revenue Retention Mean in SaaS?
If this KPI has a value greater than or less than 100 percent, it reflects the health of a company’s existing consumers. When it is greater than 100 percent, it indicates that the company is healthy and capable of expanding without gaining new clients. It also demonstrates that money earned from upgrades and cross-sells outnumbers revenue lost to attrition or downgrades.
A small adjustment in net revenue retention can add up to a lot of money over time. The reason for this is, of course, the compounding effect over time.
As a result, this is a clear indicator of any bad impact customers may have on the firm, as well as a measure of their good impact.
Increasing NRR Accountability
Through tracking your NRR you get an idea if your model is working or not. If you have an NRR above 100%, what you gain in revenue is pure growth. So your actions are determined by this one key metric. A high NRR indicates that you are able to drive more and more value to your customers.
So how do you increase NRR accountability? First, your customer success team is the accountable entity for NRR. The highest impact on NRR is customer satisfaction and relationship building. To maintain driving value, CSM should be looking at the net retention rate and customer health.
The first objective should be to show value to a customer and build a steady foundation for your relationship. The direct correlation between NRR and customer health means you have to engage and track the engagement of your customers. But the accountability extends beyond customer success to sales and marketing as well.
For increasing the accountability of net revenue retention, you have to adjust the compensation plan of your customer success team. Customer Success is a fresh field and the SaaS industry is just beginning to understand its importance. So incidentally, Customer Success has a very small bonus pool, especially within SaaS startups. You can use a variable bonus to incentivize proactive actions. Tie customer success members’ responsibilities with goals and attach it to the variable bonus. This streamlines their energy and focuses on expansion & health scores.
Additional Resource: Gross Retention Rate Vs Net Retention Rate
Net Retention and Health Scores
Net retention is a great metric to leverage because it provides very specific insights. We know that Net Retention is directly related to health scores. But how do you build it to be a reliable metric since there are so many variables? At the start, it is going to be a trial and error process. There will be many iterations to the health scores as you set every positive and negative indicator & wait for its impact. Some variables will be irrelevant in your cases and you have to identify then eliminate them.
Learn about industry trends in customer health scores
Some of the key areas we see driving customer health scores are:
- Customer activity: Is your customer regularly using your product? If you don’t see them using modules that they should be, reach out and help them. Check on any deviation in activity.
- Engagement relationships: Customers that love your product will maintain a high engagement with your team. Sending them helpful resources and added value is a great way to build on that relationship.
- Service Tickets: It is an engagement and activity but deserves a space of its own. You should track any pattern change in customer tickets. If you see activity go down with increasing tickets, it tells you that they are running into a wall and you should reach out to them.
- Stakeholders: Another variable is if you are reaching out to the right stakeholders when talking to them. It is a huge indicator of risk if your engagement with the right stakeholders is minimal. You might run into a major change in strategy and you can be blindsided by the decision.
Health scores are complex and you should focus on becoming data-centric. With an NRR focus data becomes very important. You have to know when to reach out to customers for expansions and upsells.
What is the best way to visualize the Net Revenue Retention Rate?
Net Revenue Retention Rate is usually measured monthly or annually. Although measuring both dollar and customer retention gives you a more complete picture of retention, NRR is a good place to start. Remember to check your NRR percentage at least once a month to remain on top of any negative (or positive!) swings in your revenue.
How to increase Net Revenue Retention?
If your NRR is less than 100% you are not doing something right.
- You could not have a solid customer marketing strategy
- Are not paying attention to churn bleed
- Missing upsell opportunities
But we are here to help you out and tell you how to increase your NRR.
Provide the best customer service
Good customer service minimizes churn thus increasing your NRR. It is the foundation of your customer success department. It also increases the likelihood of upselling and cross-selling. But nailing customer service is a complex process and here are a few pointers that might help:
- Make your marketing efforts customer-centric. Have roles and responsibilities that optimize customers’ journeys and support them whenever they need help.
- Assist swiftly and quickly. Customer experience is heavily reliant on how quickly you can assist the customer.
- Make the customers feel special. Send them out special mails and resources to keep them engaged.
Optimize Product Engagement
How does your customer engage with your product? This is where you have to collect data and be vary of changes. Understanding what a customer goes through when they use your product is key to retention and upselling.
- It all starts with a smooth onboarding flow
Onboarding is when you provide your first value. You showcase your product to the customer and give them reasons why it is useful to them. But a smooth onboarding flow means that the customer can focus on those reasons. This highlights what makes your brand special.
A free customer onboarding guide for you!
- Announce resources and new features
Make sure you are sending out alerts on new features and any changes you make to the product. The new feature might be exactly what a customer needs. Also if you have a more complex product be sure to include training material and resources in your blog posts and emails.
- Get tools to capture data & provide insights
You can never trust the customer to tell you exactly how they feel but you can trust data. Telemetry data from your customers let you make the first action before a problem even arises. CustomerSuccessBox integrates with your CRM and provides you with actionable insights that directly impact your revenue. Our product combines data with artificial intelligence to provide real-time health scores that tell you when to upsell, retain and help at-risk accounts.
Read: Customer Retention best practices to maximise renewals
Net Revenue Retention Frequently Asked Questions
Net Revenue Retention Rate Frequently Asked Questions
What does it mean when NRR is over 100%?
When the NRR is greater than 100 percent, it means that up-sells and cross-sells create more revenue than the revenue lost due to churn.
What is the Difference Between NRR and GRR?
Gross Revenue Retention (GRR) does not consider expansion in its calculations, whereas Net Revenue Retention (NRR) does (in the form of upgrades). GRR is used to track revenue stability, while NRR is used to look at the big picture of revenue growth and flow. The NRR vs GRR Comparison Page has further information.
Net Retention Revenue’s importance to your success and valuation will remain consistent throughout your journey. This leads back to how important customer success is for the growth of SaaS businesses. It is an all-around growth system-for increasing customer value, improving revenue, and shareholder value. Experts at CSB know that the area of focus to increase NRR are: value-based delivery, better product adoption, churn identification, perfecting onboarding, road mapping client needs & journey, and a high touch customer management.