NRR in SaaS: Why net revenue retention is vital

In SaaS, sustainable growth hinges on more than just acquiring new customers. Net revenue retention (NRR) has emerged as a critical metric for evaluating a SaaS company's long-term health. 

According to ChartMogul, the median company with 100% or higher NRR grows at 48% year-over-year, double the speed of SaaS companies in lower NRR ranges. 

In this article, you will learn:

• What NRR is and why it matters for SaaS businesses
• How to calculate NRR and understand its key components
• What constitutes a good NRR and how it varies across industries
• Effective strategies to boost your NRR and drive sustainable growth

Let’s get started by explaining what NRR is and why it’s a vital metric. 

What is NRR?

NRR is a metric that calculates the percentage of revenue retained from existing customers over a specific period. This calculation includes revenue from expansions like upsells and cross-sells but also accounts for revenue lost from downgrades and cancellations. 

NRR helps businesses understand customer loyalty and the quality of service provided. A high NRR indicates that customers are not only staying but also increasing their spending, which is a strong sign of business health. 

It's considered a key customer success metric because it reflects the ability to retain and grow revenue from the current customer base.

Is net revenue retention the same as net dollar retention?

Yes, NRR and net dollar retention (NDR) refer to the same metric. While both terms are used, net revenue retention is often considered the more common and globally recognized term. 

So, when discussing NRR in SaaS, whether you call it NRR or NDR, you're talking about the same thing.

Why is NRR such a valuable metric in SaaS? 

NRR in SaaS provides a clear picture of revenue health by showing how much revenue is retained and grown from existing customers. 

Relying on this metric is different from simply looking at new customer acquisition, as NRR focuses on the ongoing value generated from the current customer base. Now, let’s take a closer look at the exact reasons why NRR in SaaS is so important.

Customer loyalty and product satisfaction

A high NRR, especially above 100%, indicates that a company is keeping its users and successfully expanding their usage and spending. 

Such a high percentage is a powerful indicator of product satisfaction and customer loyalty. It suggests that the company's offerings meet customer needs and that the customer relationships are strong.

Impact on business growth

Companies with high NRR can achieve notable revenue growth even without adding new customers. This phenomenon happens because the increased spending from existing customers offsets any revenue lost from churn. 

In fact, the higher the NRR, the faster the potential revenue growth. That’s why NRR is also a key metric for investors, as it signals long-term sustainable growth.

Influence on business operations

Furthermore, NRR influences how a business operates. For example, a strong NRR often correlates with a growing Customer Success team, as these teams play a vital role in driving expansion revenue and reducing churn. 

It can also influence the technology a company invests in, as Customer Success platforms can help track and improve NRR. Finally, NRR can shape customer marketing strategies, as understanding why users stay and expand helps inform how to attract and retain similar users.

How to calculate net revenue retention 

Calculating NRR in SaaS involves a straightforward formula, but understanding the components is key. Essentially, you're looking at the revenue from the same group of customers over a period, accounting for both growth and losses.

Breaking down the NRR formula metrics

The NRR formula consists of several key elements:

• Starting MRR: This is your Monthly Recurring Revenue at the beginning of the period you're analyzing. It's your baseline.
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• Expansion MRR: This includes any additional revenue from existing customers through upsells, cross-sells, or upgrades.  
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• Contraction MRR: This represents lost revenue from downgrades or reductions in service by existing customers.  
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• Churn MRR: This is the revenue lost from customers who canceled their subscriptions.  

Each of these metrics plays a vital role in the overall NRR calculation. Understanding each component helps businesses pinpoint areas of strength and weakness in their revenue retention strategy.

Basic NRR calculation and example

The basic NRR formula is:

NRR = (Starting MRR + Expansion MRR - Contraction MRR - Churn MRR) / Starting MRR * 100

For example, if a company starts with $100,000 in MRR, adds $15,000 in expansion revenue, experiences $5,000 in contraction, and loses $2,000 to churn, their NRR would be:

NRR = ($100,000 + $15,000 - $5,000 - $2,000) / $100,000 * 100 = 108%

This indicates a healthy NRR, showing the company generated more revenue from its existing customer base than it lost.

Extra tip: Want a deeper dive into calculating NRR? Check out our article on how to calculate NRR. It provides a more in-depth look at the calculation process and common pitfalls to avoid. 

What is a good NRR for a SaaS company?

A "good" NRR in SaaS is generally considered to be above 100%. This benchmark shows that a company is retaining its existing customer revenue while also growing it through expansions. 

An NRR above 100% suggests healthy customer relationships, a valuable product, and effective upselling or cross-selling efforts. It implies that the revenue gained from existing customers through expansions is greater than the revenue lost due to churn and contractions.  

How NRR benchmarks work in SaaS

It’s vital to understand that NRR benchmarks can vary depending on several factors, including the size and target market of the business. 

For example, enterprise-focused SaaS companies often aim for higher NRR targets (e.g., 110% or more) due to the higher contract values and potential for significant upsells within large organizations. 

Smaller businesses, on the other hand, might consider an NRR in the 90 to 100% range to be a good indicator of performance.  

When evaluating NRR, it's crucial to consider the specific context of the business. While exceeding 100% is a positive sign, the ideal target will depend on the company's specific goals and circumstances.

Which industries typically see the highest NRR rates?

NRR benchmarks vary, but some industries tend to see higher rates than others. SaaS businesses with strong recurring revenue models, low churn rates, and substantial upselling opportunities often achieve higher NRR. These may include:  

• Enterprise software: Companies providing mission-critical software solutions to large organizations often have high NRR due to the stickiness of their products and the potential for expansion within large accounts.
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• CRM and marketing automation: These platforms, which become deeply integrated into customer workflows, often see high NRR.
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• Data and analytics: As businesses rely more on data-driven decision-making, the need for robust analytics platforms increases, which can lead to high NRR for providers in this space.
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• Collaboration and productivity tools: Tools that become elemental for team communication and project management often exhibit strong NRR, as users are less likely to switch once they are integrated into daily workflows.

Remember: It's important to keep in mind that these are just general trends, and a company's specific NRR will depend on its individual performance and market conditions.

Which team is responsible for NRR in SaaS?

NRR in SaaS is a shared responsibility, although some teams have a more direct impact. It's not solely owned by one department, but rather a metric that reflects the collective performance of several key players. Here's a breakdown of the teams involved:  

• Customer success: This team typically takes the lead on NRR. They build relationships with customers, understand their needs, and identify expansion opportunities. They are crucial for reducing churn and driving upsells and cross-sells.  
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• Sales: Sales teams contribute to NRR by focusing on upselling and cross-selling to existing accounts. They play a vital role in increasing revenue from the current customer base.
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• Product: The product team impacts NRR by developing a valuable product that customers want to keep using. They also incorporate customer feedback to improve the product and drive retention.  
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• Marketing: Marketing teams support NRR by creating engaging content and campaigns for existing customers. This team helps communicate the product's value and nurture customer relationships.  
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• Executive team: Ultimately, the executive team sets the overall strategy and goals, which influence NRR. They confirm that all teams are aligned and working toward the same objectives.

8 strategies to increase NRR in SaaS

Improving NRR in SaaS requires a multi-faceted approach. Here are some actionable strategies:

• Personalize onboarding: Tailor the onboarding process to individual customer needs and goals. This helps customers quickly realize the value of your product, increasing their likelihood of staying and expanding.
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• Offer self-service support: Provide readily available in-app support resources like knowledge bases, tutorials, and FAQs. This approach empowers customers to find answers quickly and reduces frustration, improving their experience.  
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• Proactively identify churn risks: Use tools like Net Promoter Score (NPS) surveys and product usage data to spot customers at risk of churning. Reach out to these customers to address their concerns and offer assistance.
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• Drive account expansion: Implement in-app messaging and other strategies to promote upsells and cross-sells. Make it easy for customers to upgrade or add new features as their needs grow.
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• Gather churn feedback: Conduct churn surveys to understand why customers leave. Use this feedback to identify areas for improvement in your product, service, or customer experience.
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• Build customer engagement models: Segment customers based on their value and tailor engagement and support programs accordingly. Focus on delivering value quickly and consistently.
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• Identify expansion opportunities: Use customer health scores to pinpoint the right time to discuss expansion with customers. Monitor usage, feature adoption, and other signals to identify potential upsell opportunities.
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• Incentivize customer success teams: Align Customer Success team compensation with NRR goals. This approach encourages them to proactively seek expansion opportunities and reduce churn.

FAQs

NRR vs. GRR: What’s the difference?

NRR considers revenue from expansions (upsells, cross-sells) while GRR (Gross Revenue Retention) only measures revenue retained from existing customers, excluding expansions. 

What role does customer feedback play in improving NRR for SaaS companies?

Customer feedback helps identify pain points, understand customer needs, and inform product development, all of which contribute to increased customer satisfaction and reduced churn.  

What are the most common mistakes that cause a decline in NRR?

Common mistakes include neglecting customer onboarding, ignoring churn signals, failing to offer self-service support, and not actively seeking expansion opportunities.  

What tools can help improve NRR?

Tools that track customer usage, automate communication, gather feedback (like NPS surveys), and manage billing and revenue recognition can all help improve NRR. 

Orb is a platform that simplifies billing and revenue operations, enabling flexible pricing and accurate tracking, which can contribute to better NRR management.

How Orb can help your team increase NRR in SaaS

We've discussed the importance of NRR in SaaS and how it's a key indicator of sustainable growth. Managing and improving this metric effectively requires SaaS billing software that's as dynamic and adaptable as your business.

That's where Orb comes in.

Orb helps SaaS and GenAI companies unlock their usage data, enabling flexible pricing, billing, and faster growth. Unlike traditional billing systems, Orb helps you take control of your revenue strategy and directly influence your NRR in SaaS.

Here's how Orb contributes to a stronger NRR:

• Unleash pricing agility: Static pricing models can stifle growth. Orb decouples usage data from various SaaS pricing metrics, giving you the freedom to experiment and adapt. Quickly test new pricing structures and iterate on existing ones This agility allows you to discover the optimal pricing that maximizes NRR.
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• Provide billing accuracy and build trust: Accurate billing is vital for user retention. Orb Rev Graph ingests all your raw event data for precise, error-free invoices. This level of accuracy builds customer trust, reduces churn due to billing disputes, and prevents revenue leakage — all of which directly impact NRR.
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• Scale and expand confidently: Orb's extensible architecture scales with your needs. The Orb API handles high-volume data ingestion, and tools like the Orb SQL Editor simplify data analysis. 
  
  Built-in functions for billing, invoicing, and reporting work together to provide a unified view of your revenue, making it easier to monitor and improve NRR as you expand.

• Benefit from an expert partnership: Transitioning to usage-based pricing in your existing strategy can be challenging. Orb provides expert guidance and support to help you navigate this process. From implementation to continuous improvement, Orb is your partner in achieving your NRR goals.

Ready to explore how Orb can transform your revenue strategy? Explore our flexible pricing options and find the perfect fit for your business.