What does net revenue retention mean?
Net revenue retention, or NRR, is a SaaS statistic software companies use to see how well they can keep and get new customers. It finds the difference between the total revenue from current customers (including revenue from upsells and cross-sells) and the revenue churn (which includes canceled or downgraded contracts, ended contracts, and new customers) for a given month, quarter, or year. It is shown as a percentage.
NRR differs from other SaaS measures because it only looks at a company’s current customers. The main factors affecting NRR are the churn rate, customer retention, and sales into current accounts.
“How much of the total revenue generated by users last period are we still seeing this period?” is what net revenue retention boils down to.
Like words
- Rate of revenue retention (NRR)
- and net dollar retention (NDR)
Why NRR Is Important
The SaaS business model can grow because it is predictable. Since most businesses depend on one-time sales, they always look for the next customer. Even though getting new leads is an integral part of their plan, SaaS companies can count on steady revenue every month even if they don’t find any new customers.
Company members depend on NRR to determine how well a product is doing.
NRR shows how stable a subscription business’s recurring revenue streams are. A high revenue retention rate means customers stay with the company and use the product more.
NRR also tells businesses a lot about how customers feel about their goods because it is linked to how many customers leave and how much money they lose. A low percentage of income kept almost always means a problem with the product, how it fits the market, the customer experience, or the value proposition.
Investors look at NRR to guess how well and how stable the market will be in the future.
Six to seven times more money is spent on getting a new customer than keeping an old one. And businesses only have a 5% to 20% chance of selling to a new customer. On the other hand, they have a 60% to 70% chance of selling to a current customer.
NRR is essential for investors because it shows how healthy a company is and how well it can grow in a way that doesn’t harm the environment. Investors use NRR to make intelligent decisions about investing in a business.
Many companies in the SaaS industry have had a “growth at all costs” mindset in the past, meaning they were willing to lose money to get more customers.
But today’s most successful businesses (and those who invest in them) know that net revenue retention (NRR) is a much better measure of long-term success than pure user growth. They put a lot of effort into improving the NRR.
In the case of Snowflake, the company kept 158% of its net income after its IPO in September 2020. This means that current users stay with the business and use it more, which is excellent for any SaaS company.
How to Figure Out Net Revenue Retention (NRR)
To figure out NRR, you must examine two main factors: recurring income from current customers and revenue churn.
This is the formula:
The net amount of revenue kept equals the difference between the total revenue made and the revenue lost.
Total revenue is the money you made from your current customers at the start of the period, plus any extra money you made from upsells or cross-sells. Revenue churn is the money you lose when people quit your service, their contract expires without renewal, or their plan is downgraded.
The NRR tells you how much of your income comes from repeat customers. If expansion revenue outpaces churn, the NRR could go above 100%.
What is the best NRR rate for the SaaS business?
If it’s less than 100%, it means that a company is losing its steady sources of income faster than it is getting new customers.
There aren’t many things that can be done to make more money from each user. For example, a SaaS company that charges “per user per month” makes more money every time a customer adds a new user.
In this way, an NRR greater than 100% should almost always come from a high recall rate.
Most SaaS companies that go public have NRR rates well over 120%, which is what “optimal” rates look like. For example, Twilio was running at 140% NRR, and Snowflake was running at an even higher rate.
How Losing Customers Affects How Much Money You Keep
The ideas of customer churn and income churn are not precisely the same.
Customer churn is the number of people who stop buying from a business during a specific period. Revenue churn is the amount of money that is lost when customers quit or downgrade their subscriptions.
In every case, losing customers hurts keeping customers. But not every loss of a customer changes the NRR equation in the same way.
For example, when a small customer on a lower subscription tier cancels, they would bring in the same amount as a large customer on the top subscription tier.
Both would have the same effect on the loss rate but have very different effects on NRR.
Tips for Keeping More of Your Net Revenue
Improving net income retention at the most basic level is pretty straightforward. A company only needs to ensure it doesn’t lose more customers than it gains through upgrades, more significant contracts, and other ways of getting more customers.
Not only that, but doing this is much more complicated. Here are some ways to keep more of your net revenue:
Pay attention to perceived value
“Perceived value” is the idea that people don’t just buy things based on how much they’re worth but also on how important they think those things are.
Customers’ overall impression and emotional response from interacting with a company and its goods. It includes more than just the features and benefits of a product or service.
Regarding net income retention, customers are more likely to keep using a product and bring it to new users and business units if they can see its value.
There are several ways to make something seem more valuable.
Effectively bring on new customers. People are less likely to keep using a product if they don’t know what it’s good for or how to get value from it. A suitable method for onboarding new customers can help show them how to use the product well and get the most out of it.
Build meaningful connections with your customers. Know what your people want, try to guess what problems they might have, and build relationships with them that go beyond just selling them something.
Support them regularly. Give your customers help after the original onboarding process is over. Make sure you can help people who are having trouble with the product, whether through in-app chat, email, or the phone.
Send customers helpful information. Customers can learn about new features and use cases by reading blogs and emails with how-tos, business use cases, and essential tutorials for their industry. This can help them find ways to get more value from your product.
Try It Free
Using freemium pricing, many subscription services offer free trials as part of their business strategy.
Free trials may be the reason for as many as 66% of B2B sales, and the average SaaS free trial conversion rate is close to 20%.
Free trials are great for NRR because they get people who aren’t paying to try your service. Free trial users can only help raise the NRR rate when they become paid customers. This is because they won’t change the numbers in the wrong way.
They also want to “try before they buy” many things. They are more likely to convert if you offer a free trial or freemium price with a few core benefits.
Letting buyers get to know the product ahead of time dramatically boosts sales volume and net present value (NRR), mainly if your company has achieved product-market fit.
How to Set Prices
In a way, your pricing strategy builds on your value proposition. Customers can learn much about your product from how you price it compared to others on the market.
Pricing is all about giving each group of customers the right mix of benefits at prices that make sense for them. People who think they’re paying too much for their subscription plan are likelier to stop it or move down to a cheaper one.
There is no exact way to set prices. Most SaaS companies use tiered pricing because it gives each customer the right amount of value and still has room to grow (which increases NRR) when they’re ready.
But what a “fair price” means depends on how much something is considered worth. When customers agree that your product is worth the price you charge for it, they’re less likely to cancel or downgrade their monthly plan.
Lower the churn rate. Since churn and retention work opposite, dropping the churn rate will have the same effect on the retention rate but in the opposite direction.
As we’ve already discussed, revenue churn and customer churn affect your net revenue retention method differently. On the other hand, lowering the churn rate will almost always make your NRR go up.
Some ways to lower the loss rate are as follows:
- Getting better at customer service
- Making sure that training works and is easy to understand
- Utilizing customer loyalty programs to honor long-term customers
Regularly sending out surveys and getting feedback from customers · Looking at which benefits customers use the most
Adding strategies for reducing customer churn to your NRR formula has the extra benefit of helping you find places to improve and make customers happier.
Turnaround From monthly to yearly income.
Most of the time, current customers’ monthly recurring revenue (MRR) is used to figure out NRR. However, this metric has a significant flaw: it’s susceptible to short-term changes.
Your MRR changes right away if a customer cancels or downgrades their plan. This can cause significant changes in your NRR even if the number of users stays the same.
To even out this volatility, pushing yearly payments instead of monthly ones lessens the impact of customers leaving. You’re promised that money for the whole year because an annual payment covers 12 months of income.
This gives you a lot more chances to get to know these customers, help them see how valuable your product is, and fix any problems that might come up.
That way, you can give people who are already loyal a better deal on something they’ll still use.
Because of this, most businesses offer both monthly and yearly plans. As an incentive, they give away one or two months for free, which saves customers money and protects them from short-term income loss.
Set up automatic renewals.
If a business customer sets up a system for the whole company, they probably won’t forget to renew their contract. But more minor contracts often do.
In any case, having a customer success team member talk to a customer about continuing their contract is a hassle that doesn’t need to be there.
A subscription management tool that automatically renews contracts can help reduce this hassle and make customers less likely to forget to renew.
Cut down on unwilling churn.
A big part of the average SaaS churn rate (usually between 20% and 40%) is involuntary churn when a customer leaves without wanting to.
There are several reasons for forced turnover, and most of them can be avoided:
Credit card expiration dates
- Billing mistakes and payment problems
- Data mistakes or wrong setup in CRM or billing
- Server problems: ·Not enough money
A cloud-based subscription management tool automatically handles all these issues by reporting any problems and letting customer success teams (or the customer) know when user accounts are at risk.
Cross-selling and upselling should be done more.
According to the NRR equation, upselling and cross-selling are the two main ways to increase sales and make more money.
To sell more to a customer, you need to figure out what features they’re not using and give them an updated plan that includes those features. Upsells are a great way to give the same customer more value, but they aren’t always possible.
Plus, they’re much more likely to buy than a new prospect, and you don’t have to pay anything to get them as a buyer.
For cross-selling, you must know which goods or services your customers can use together. Cross-selling is easier for SaaS companies that have native app integrations or microservices because it’s easier to suggest a buy that goes well with the one the customer is already making.
Another thing a subscription company can do to cross-sell is provide consulting, implementation, IT services, and training for large groups of people.
Upselling and cross-selling can help your goods stand out and increase your NRR simultaneously. Customers will think that your offering is better than other options on the market.
Connect CRM, CPQ, ERP, and billing to subscription management.
Tech stack integration is a must if you want to improve business efficiency, keep customers longer, and give them a great experience.
If you connect a subscription management tool to your CRM, CPQ, ERP, and billing software (if it doesn’t already have billing), your customer success teams can quickly solve customer problems and give each customer a unique experience.
It also improves data flow, so people on the sales and customer success teams will know which customers subscribe to which goods and how they use them.
