When you are running a business, you always want to keep a close eye on whether your company is thriving and profitable. For most companies, the number one metric to track is Monthly Recurring Revenue (MRR), but because subscription revenue is the key marker of a Software as a Service (SaaS) business, a different metric is needed to grasp the true health of your company. This is why Net Revenue Retention is one of the most important indicators for SaaS companies.
What is NRR?
Net Revenue Retention (NRR), also referred to as net dollar retention, is one of the most valuable Key Performance Indicators in SaaS Metrics. This metric calculates the health of a company based on the existing customer retention rate. Not only does it measure how successful a company is at renewing or sustaining customer contracts but also how well it is doing at generating additional revenue from this existing customer base.
By keeping close tabs on what is happening with your customer’s journeys through measuring the NRR, you are able to better gauge customer success in your company as a whole. You will have a good picture of how long customers use your product, what kinds of products they choose to upgrade, and how often they unsubscribe. Knowing this information helps to make long term plans for how to increase the value of your business in the future.
Four Factors Used to Calculate NRR
Monthly Recurring Revenue
This is the amount of revenue that a company can expect to receive in a given month.
Expansion Revenue
This is the amount of revenue that is added in a time period due to upgrades and cross-sells.
Revenue Reduction
This is the amount of revenue that is subtracted due to downgrades to lower payment plans.
Revenue Churn
This is the amount of revenue lost due to customer cancellations.
Calculating NRR
To calculate your company’s Net Retention Rate, you begin by adding the MRR and Expansion Revenue together. This is the total revenue for the month. You then subtract the month’s revenue lost due to downgrades and cancellations. Then divide by the original MRR number. This result should be a percentage over 100% if your business is operating with healthy growth.
For example, let’s say last month’s MRR is $75,000 and your expansion for the month was $10,000. Reduction and Churn were low at $2,000 each. That equation would be:
(75,000 + 10,000 – 2,000 – 2,000) / 75,000 = 108%
This shows that despite reduction and churn for the month, the company is still growing without any added customers.
Difference Between NRR and GRR
Net revenue retention rates and gross revenue retention are very similar metrics. The difference is that gross revenue retention does not factor upsells and upgrades into account. This gives a different perspective and more precise view at calculating the customer churn rate. This method of measuring churn helps to see exactly how your company is being affected by customers leaving your business. Both of these metrics are important for measuring the health of your company.
RevTek Capital’s Role in SaaS
RevTek Capital’s Role in the Software as a Service world is by providing low cost capital through revenue based financing to help you reach your next growth level. Above simply earning business, we desire to develop partnerships with thriving companies, and we desire to help you get there.
Our team can not only help by providing growth capital, but we can also connect you with experts in SaaS metrics.
Connect with our team if you are ready to grow and need more assistance with calculating Net Retention Rate in SaaS.
