How to calculate Net Revenue Retention (NRR) in Google Sheets using AirOps
NRR: How to calculate it, why it’s so important (especially for SaaS companies), and frequently asked questions about NRR.
What is Net Revenue Retention (NRR?)
Net Revenue Retention (NRR) refers to the percentage of recurring revenue retained from existing customers over a specific period. NRR considers upgrades, downgrades, and Customer Churn to measure growth potential from the company's current customer base.
While NRR is important for all subscription-based businesses, it is especially critical for SaaS companies. SaaS businesses typically have higher churn rates than other types of businesses. For this reason, SaaS companies must continuously work to improve their offerings and keep their customers engaged if they want to maintain a high NRR.
Plus, NRR is one of the top metrics that potential investors will want to see – it's a great indicator of a company's overall financial health. Any company, SaaS or otherwise, that hopes to secure venture funding would be wise to measure, monitor, and push for improvements to its NRR.
How to calculate Net Revenue Retention
To calculate NRR, divide the total recurring revenue from existing customers in a given period, subtract any churned or lost revenue during that same period, and then multiply that number by 100 to get your NRR as a percentage.
Net Revenue Retention = (Starting MRR + Expansion MRR – Churned MRR) ÷ Starting MRR x 100
A few notes on the NRR calculation inputs:
- MRR stands for Monthly Recurring Revenue
- Expansion MRR refers to upsells, cross-sells, and price increases
- Churned MRR refers to cancellations, non-renewals, and account downgrades
For example, a company starts the month with an MRR of $35,000. They end the month with an MRR of $43,000 thanks to upsells from existing customers, but they also lose $7,000 in expired subscriptions.
The NRR formula for this company would look like this: ($35,000 + $8,000 - $7,000) ÷ $35,000 x 100 = 102.86
In this example, our SaaS company would have an NRR of 102.86% for the month.
Track Net Revenue Retention alongside other important metrics in Google Sheets
On its own, NRR doesn't provide a complete picture of your organization's financial performance. That's why it should always be tracked alongside other metrics.
Tracking and analyzing multiple metrics isn't always easy, though – most companies have important data scattered across different SaaS tools and other systems. In our experience, most teams prefer to analyze data in operating documents they already know and love, like Google Sheets ❤️.
Getting high-quality data into an operating document like a GSheet isn't necessarily easy, as you probably know all too well. Especially if it requires you to spend hours manually downloading CSVs from different sources and copying the data into a rickety, VLOOKUP-filled spreadsheet 👎.
While you can use the basic calculation we shared earlier, there's a much more efficient way to calculate your team's ARPU (and other essential PLG metrics): the AirOps PLG Scorecard.
This template makes measuring revenue performance a breeze. In addition to NRR, use it to easily track metrics such as:
- Cost Per Lead
- Activation Velocity
- Monthly Recurring Revenue (MRR)
- Net Promoter Score (NPS)
- Customer Churn
… and more. Get in touch with our team to learn more and get started! While NRR is an important metric for certain organizations to measure, you need a more complete picture if you want to measure your organization’s overall performance.
Frequently asked questions about Net Revenue Retention
Should my organization track Net Revenue Retention?
The answer to this question (and any other "Should I track X?" questions) is, "It all depends on your company and its goals."
NRR can be a helpful metric for companies with recurring revenue models, like subscription-based businesses. Because it measures how much revenue is retained from existing customers over a period of time rather than just looking at new customer acquisition. It can provide valuable insights into the health and longevity of your current customer base.
If you don't have a recurring revenue model, NRR isn't a useful metric. For example, most retail and manufacturing businesses have little use for NRR.
What are some examples of situations that impact Net Revenue Retention?
Some examples of situations that would impact NRR (both negatively and positively) include:
🔴 A customer churns and leaves your company completely
🟢 A customer upgrades their subscription tier
🔴 A customer downgrades their subscription tier
🔴 A customer stops using one of your products (but not all)
🟢 A customer buys additional products from you
🔴 A customer removes users (if paying per user)
🟢 A customer adds users (if paying per user)
Why is it important for SaaS companies and other subscription-based businesses to track Net Revenue Retention?
Still on the fence about whether your organization should track NRR? Here are some of the top reasons this metric is so important for certain businesses:
NRR measures growth: Companies with high NRR tend to be fast-growing because they're able to retain more customers and generate more revenue from them. On the other hand, companies with low NRR may be struggling to retain customers, which impedes growth.
Investors use it to gauge business health: Since NRR measures growth, it's not surprising that investors use it to gauge the health of a business. Due to the compounding effect over the years, a small change in NRR can result in significant revenue figures as time goes on. The same is true for negative changes in NRR.
High NRR can lead to higher valuations: As noted above, NRR is important to investors – this can lead to a higher company valuation. When your NRR is consistently increasing, it shows that the company is growing its top line (i.e., revenue) primarily through net new sales rather than through offsetting churn (i.e., customer attrition).
In other words, NRR indicates that a company has a strong growth engine. This strong growth engine will ultimately result in a higher valuation for the company.
It takes some pressure off new business growth: NRR is a crucial indicator of whether or not your business is sustainable. If your NRR is below 100%, your company relies on net new sales to make up for that churn and grow the company's bottom line. If your NRR is above 100%, your revenue is compounding, your valuation is growing, and while net new sales are critical, there is less pressure on bringing in new customers, which generally leads to a more robust funnel and customer base.
The effects of high NRR compound over time: A high NRR rate significantly impacts a company's growth year-over-year. As noted above, the effects of NRR compound over time – meaning that each year, the benefits of a high NRR rate compound and lead to even more growth.
This is important to understand because it highlights the importance of maintaining a high NRR rate to achieve long-term success. Even if a company's NRR rate dips for one year, the compounding effects of previous years' high rates will continue to help the company grow. Conversely, if a company consistently maintains a high NRR rate, the compounding effects will lead to exponential growth.
How can I increase my organization's Net Revenue Retention?
If your organization currently has a low NRR, here are seven things you can do to improve it:
- Improve customer retention: Not surprisingly, the best way to improve NRR is to reduce churn. This can be achieved by improving the customer onboarding experience, taking a more proactive approach to communicating with customers, and offering more value throughout the customer lifecycle.
- Use NPS surveys to catch customers before they churn: NPS, or Net Promoter Score, is a customer satisfaction metric that can gauge customer loyalty and predict churn. By surveying customers and asking them how likely they are to recommend your product or service to others on a scale of 0-10, you can get an idea of how satisfied they are with what you're offering. NPS can be an effective tool for reducing customer churn because it allows you to identify unhappy customers early on and take steps to address their concerns before they decide to leave. Additionally, by surveying customers regularly, you can spot patterns that may indicate when a customer is considering churning so you can take action to prevent it.
- Employ churn surveys to get to the bottom of customer churn: Churn surveys can help you identify the root causes of customer churn and take steps to reduce it.
- Increase prices: You can also increase prices, but be careful with this strategy. On the one hand, you may have a product or service in high demand, and your current pricing may need to be higher. This could also backfire if your price increases don't align with your customer's perceived value of the product.
- Offer additional value: Another way to increase NRR is to offer additional value to your customers. This could be anything from premium support packages to new features or functionality they can add to the core product or service.
- Improve sales efficiency: There are various ways to increase sales efficiency – to improve NRR, emphasize closing deals with high-quality, profitable users.
- Focus on increasing expansion revenue through upsells: Upselling is a great way to increase revenue retention. By offering customers more value than they originally signed up for, businesses can encourage them to upgrade their plans or purchase additional features. You can use modals to highlight a call-to-action (CTA) and encourage the user to upgrade. You can also implement in-app messaging to prompt the user for upgrades when they try to access features not available in their tier or sign up for a trial account.
What is a good Net Revenue Retention rate?
If your NRR is above 100%, your business is healthy and growing steadily because the revenue you gain from upsells, cross-sells, and add-ons is greater than any lost revenue from downgrades and customer churn.
However, this isn't a hard and fast rule, and what constitutes a "good" NRR varies from industry to industry and largely depends on your organization's growth goals.
For example, data from SaaS Capital's 2022 SaaS Retention Benchmarks for Private B2B Companies found that:
"While the median NRR is 102% across the entire survey, the benchmark to target for median growth rate of 40% is [an] NRR of at least 110%.
What's the difference between Net Revenue Retention & Gross Revenue Retention (GRR)?
GRR measures annual revenue lost from existing customers. And while these two metrics seem very similar, they're different.
The GRR calculation includes some of the same inputs at NRR: MRR, Churn MRR, and Contraction MRR. But, the key difference is that it does not include Expansion MRR. GRR also tends to decline as the company grows.
Both metrics have value, and GRR can provide helpful insights into your company's long-term growth potential and viability.
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