Net Revenue Retention

What is Net Revenue Retention?

Net Revenue Retention (NRR) is a key metric used to measure the revenue retained from existing customers over a specific period, typically a month or year. It accounts for the upgrades, downgrades, and churn of customers, providing a clear view of how much revenue growth is coming from the current customer base. The formula for calculating NRR is:

NRR = ((Starting MRR + Expansion MRR - Downgrade MRR - Churned MRR) / Starting MRR) * 100

Where:

• Starting MRR: Monthly Recurring Revenue at the beginning of the period.
• Expansion MRR: Revenue gained through upgrades or additional purchases from existing customers.
• Downgrade MRR: Revenue lost due to downgrades or reduced usage from existing customers.
• Churned MRR: Revenue lost due to customers leaving the service.

When is Net Revenue Retention Used?

NRR is widely used in subscription-based businesses, particularly in SaaS (Software as a Service), to track the health and growth of recurring revenue streams from existing customers. It allows companies to assess if they are retaining and growing their customer base or losing revenue over time.

NRR is used:

• In monthly or annual financial reviews to understand how the customer base contributes to the business's revenue growth.
• To evaluate product-market fit and identify areas for customer success efforts.
• To highlight upsell opportunities and growth potential from existing customers.

Pros of Net Revenue Retention

1. Customer-Centric Metric: NRR focuses on customer behavior, providing insights into customer satisfaction, product value, and engagement.
2. Predicts Long-Term Growth: A high NRR indicates that the company can grow without needing to rely solely on new customer acquisition.
3. Clarity on Upsells and Expansions: By including expansion revenue in the calculation, NRR gives clear feedback on how effectively your product is growing within the existing customer base.

Cons of Net Revenue Retention

1. Doesn't Reflect New Customer Growth: NRR only focuses on existing customers, meaning it doesn't provide insight into new customer acquisition efforts.
2. Can Be Misleading: Companies with high NRR might neglect other important areas like new customer acquisition or high churn rates, leading to stagnation if the existing base shrinks.
3. Industry Variability: NRR expectations can vary significantly depending on the industry, making it less comparable across different types of businesses.

How is Net Revenue Retention Useful for Product Managers?

For product managers, NRR offers several critical insights:

• Customer Retention: Understanding what features, services, or support are helping retain and expand customer usage is vital for long-term product success.
• Feature Prioritization: NRR can help prioritize new features that drive upsell and customer expansion, ensuring the product roadmap is aligned with revenue growth opportunities.
• Product Improvement: A low NRR can signal dissatisfaction or inadequate value among current customers, pushing product managers to investigate pain points and improve the product.

When Should Net Revenue Retention Not Be Used?

While NRR is a valuable metric, there are scenarios where it may not provide the full picture:

• In Early-Stage Companies: For startups with limited customer bases, NRR may not give meaningful insights as growth is driven more by acquisition rather than retention or expansion.
• High Churn Markets: In markets with naturally high churn (such as seasonal or one-time-use products), relying on NRR could give an overly pessimistic view of revenue stability.

Other Relevant Questions for Product Managers

1. How can NRR inform feature development?

   • NRR can highlight which features drive upsells or expansions, allowing product managers to focus on improving or scaling those aspects of the product.

2. What is a good NRR benchmark for SaaS companies?

   • NRR benchmarks vary by industry, but a good NRR for SaaS companies is typically above 100%. This means the company is growing revenue from existing customers even if some customers churn.

3. How can NRR be improved?

   • Focus on customer success strategies, reduce churn, drive upsells, and ensure that your product continues to meet and exceed customer expectations.

Conclusion

Net Revenue Retention is a critical metric for understanding how well your product retains and grows its revenue from the existing customer base. It is particularly useful for product managers in subscription-driven businesses to prioritize retention strategies, product development, and feature enhancements based on customer needs and revenue impact.

By balancing NRR with other metrics like customer acquisition and churn, product managers can ensure they are maintaining a healthy, growing business.