Net Revenue Retention (NRR)

What is Net Revenue Retention (NRR)?

Net Revenue Retention (NRR) is a metric used to evaluate the revenue growth or contraction from existing customers over a specific time period. It accounts for expansions, contractions, and churn from the current customer base, without considering new customer acquisitions. The formula is typically:

NRR (%) = (Starting MRR + Expansions - Contractions - Churn) / Starting MRR × 100

Where:

• Starting MRR refers to the Monthly Recurring Revenue from the beginning of the period.
• Expansions are additional revenue generated through upsells or cross-sells.
• Contractions are reductions in revenue due to downgrades.
• Churn represents lost revenue from cancellations.

An NRR greater than 100% indicates revenue growth, while below 100% signals revenue loss.

When is Net Revenue Retention (NRR) Used?

NRR is used in several scenarios:

• SaaS Companies: It is critical for subscription-based companies to track NRR to understand how well they retain and grow revenue from existing customers.
• Product-Led Growth Strategies: NRR helps companies that focus on expanding their existing customer base to track how successful they are at doing so.
• Investor Metrics: Many investors and financial analysts use NRR to evaluate the health of a company’s business model and its ability to retain and expand customer revenue.

Pros and Cons of Net Revenue Retention (NRR)

Pros:

• Holistic View of Customer Base: NRR captures not just churn but also expansions, giving a fuller picture of revenue movement within existing customers.
• Growth Indicator: NRR can show that even if a company is losing some customers (churn), its ability to upsell or expand within its existing customer base could still result in net growth.
• Performance Benchmark: Companies can use NRR to benchmark their growth against industry standards, as a higher NRR is a sign of effective retention and expansion strategies.

Cons:

• Ignores New Business: NRR only tracks revenue from existing customers and does not account for revenue from newly acquired customers.
• May Obscure Issues: A high NRR might hide potential problems in acquiring new customers or an underlying churn issue if expansions are masking revenue losses.
• Short-Term Focus: If used in isolation, NRR may encourage teams to focus only on short-term revenue gains from existing customers rather than long-term customer satisfaction or innovation.

How is Net Revenue Retention (NRR) Useful for Product Managers?

NRR provides valuable insights for product managers, especially in SaaS or subscription-based models:

• Customer Success Tracking: Product managers can use NRR to evaluate how effectively their products are helping customers achieve success and stay engaged, which can lead to upsells or expansions.
• Feature Prioritization: A high or low NRR can signal to product managers which product features are driving growth or contributing to churn, guiding their development efforts.
• Retention Strategy: Product managers can design initiatives to improve retention and reduce churn by focusing on user needs, support, and feature usage patterns.

When Should Net Revenue Retention (NRR) Not Be Used?

• In Early-Stage Companies: For companies still acquiring customers, NRR might not be the most important metric since it only considers existing customers and not new ones.
• Highly Seasonal Businesses: In industries with large seasonal variations in revenue, NRR might not give a clear picture of underlying trends.
• If Customer Expansion is Not Key: For businesses that don’t rely heavily on upsells or cross-sells, such as those with flat-fee pricing models, NRR might not be as critical.

Additional Questions Product Managers Should Consider:

1. How can we improve customer retention to boost NRR?

   • Product managers should identify features or services that improve customer stickiness and minimize churn.

2. What drives expansion revenue in our product?

   • Understanding the features or add-ons that lead to successful upselling or cross-selling can help prioritize the right product investments.

3. Are we focusing too much on upsells instead of overall customer satisfaction?

   • Ensuring that customer satisfaction is the core driver behind revenue growth rather than just upsells is key for long-term success.

NRR is a powerful metric for understanding how well a product retains and expands within its existing customer base, providing valuable insights for driving growth and improving customer engagement.