NRR Meaning Explained: Calculate & Improve Your Retention

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If you work for a SaaS or subscription-based business, you’ve probably heard about net revenue retention, or NRR. But what does NRR mean, exactly?

NRR is a key performance indicator (KPI) that measures a company’s ability to keep existing customers and grow revenue from them over time. A high NRR suggests that a company’s customers are loyal and its business is growing.

NRR is a metric that many investors use to gauge the long-term health and growth potential of a company.

This article defines NRR, explains why it matters, and provides insights that can help you understand and improve your company’s NRR.

What does Net Revenue Retention (NRR) really mean?

Okay, let’s break down what Net Revenue Retention is all about. Think of it as a health score for a business, showing how well it keeps its existing customers happy and growing.

What is Net Revenue Retention?

NRR is the percentage of recurring revenue a company keeps from its current customers over a certain time. It’s not just about keeping them, though; it also factors in when customers upgrade, downgrade, or leave altogether.

The beauty of NRR is that it tells you how much a company can grow without depending only on getting new customers. It shows the strength of a business’s existing relationships.

To really understand NRR, you need to know its parts:

  • Expansion Revenue: This is the extra money you get when customers buy more, like upgrading to a better plan or adding features.
  • Contraction Revenue: This is the money you lose when customers downgrade or use less of your product.
  • Churned Revenue: This is the money lost from customers who cancel their subscriptions completely.

Calculating Net Revenue Retention (NRR)

The standard formula for calculating NRR is:

NRR = [(Starting MRR + Expansion Revenue) – (Churned Revenue + Contraction Revenue)] / Starting MRR

Another way to calculate NRR is to divide the current ARR by the previous year’s ARR for the same group of customers.

Here’s a step-by-step breakdown of how to calculate NRR:

  1. Figure out your Monthly Recurring Revenue (MRR) or Annual Recurring Revenue (ARR) at the beginning of the period.
  2. Calculate the total expansion revenue from existing customers during that period.
  3. Calculate the total churned revenue from customers you lost during the period.
  4. Calculate the total contraction revenue from customers who downgraded their subscriptions.

For example, say your starting MRR is $100,000, your expansion MRR is $10,000, your lost MRR is $5,000, and your downsell MRR is $5,000. Your NRR would be 100%.

NRR vs. Other Key SaaS Metrics

NRR doesn’t tell the whole story on its own. To get a clearer picture of your company’s financial health, you need to compare it to other key SaaS metrics.

NRR vs. Gross Revenue Retention (GRR)

Gross Revenue Retention (GRR) tells you what percentage of revenue you’re keeping from your current customers, but without counting any extra money you make from them when they upgrade or add more services. The biggest difference between NRR and GRR is that GRR doesn’t include upsells or cross-sells.

If you want to know how well your company is doing overall, NRR is a better measure than GRR because it takes these upgrades into account. GRR can be useful if your company doesn’t have many chances to upsell.

NRR vs. Annual Recurring Revenue (ARR)

Annual Recurring Revenue (ARR) shows the total yearly value of your recurring revenue. The key difference is that ARR is like a snapshot of your revenue at a specific time, while NRR shows how your revenue changes over time.

NRR tells you more about whether your customers are staying loyal and whether there’s room to grow, which you can’t see with just ARR.

NRR vs. Monthly Recurring Revenue (MRR)

Monthly Recurring Revenue (MRR) is the same idea as ARR, but it looks at your revenue each month. Like ARR, MRR is a snapshot, while NRR shows how your revenue changes. NRR gives you better insight into customer loyalty and potential growth than MRR alone.

What is a good Net Revenue Retention Rate?

What is considered a “good” NRR? Here are some benchmarks to keep in mind:

  • An NRR above 100% means your business is growing from its existing customers.
  • The best SaaS companies may see NRRs over 120%, but most companies aim for around 100%.
  • A small to medium-sized business with an NRR of 90% is in great shape.

What is considered a “good” NRR for your business will depend on several things, including:

  • how long you’ve been in business
  • your target market
  • your pricing model

It’s important to remember that NRR is only one metric. You should look at it alongside other metrics to get a complete picture of how your company is doing.

What influences net revenue retention?

Several factors can affect a company’s net revenue retention rate. Here are some of the most important:

  • Customer Satisfaction: Satisfied customers are more likely to stay with you and buy more products from you. You can improve customer satisfaction by personalizing their experience.
  • Churn Rate: The lower your churn rate, the better your NRR will be. By analyzing the reasons customers leave, you can improve your retention strategies.
  • Upselling and Cross-selling Strategies: When you successfully upsell and cross-sell products to existing customers, you expand your revenue. It helps to offer attractive upsells to your long-term customers.
  • Pricing Strategy: Customers are more likely to stick with you if your pricing is competitive and flexible. You can also consider offering loyalty discounts or tier-based price increases.

How to Improve Net Revenue Retention

If your company’s NRR is not where you want it to be, there are several things you can do to improve it:

  • Focus on Customer Success. Provide proactive customer support and onboarding. Build strong customer relationships. When customers feel supported and valued, they are more likely to stay with your company and increase their spending.
  • Enhance Customer Experience. Make each customer’s journey unique to them. Ask for customer feedback and then take action to improve the customer experience.
  • Optimize Pricing and Packaging. Provide a range of flexible pricing options and compelling upgrade paths to encourage customers to spend more.
  • Analyze Customer Data. Look for patterns and trends in customer behavior. Use the data to personalize offers and decrease churn.

Frequently Asked Questions

What is a good NRR rating?

A “good” NRR rating depends on the noise levels you’re exposed to. Generally, the higher the NRR, the more noise reduction. For example, if you’re around consistently loud machinery, you’d want a higher NRR than if you’re just dealing with moderate noise. Aim for an NRR that brings the noise level down to a safe and comfortable range for your ears. Keep in mind that NRR is a theoretical value and real-world protection is often lower.

What does NRR 32 mean?

An NRR of 32 indicates that the hearing protection device, under ideal laboratory conditions, can reduce noise levels by up to 32 decibels. However, in real-world situations, the actual noise reduction is typically lower. To estimate the real-world protection, it’s often recommended to subtract 7 from the NRR and then divide by 2. In this case, (32-7)/2 = 12.5 dB of protection.

What does NRR mean in business?

While NRR primarily relates to hearing protection, in a business context, NRR can also sometimes refer to “Net Revenue Retention.” This is a key metric that measures the percentage of recurring revenue retained from existing customers in a specific period. It takes into account revenue lost through churn and revenue gained through upgrades, cross-sells, and add-ons. A high NRR (above 100%) indicates that a company is not only retaining its existing revenue but also growing it through its current customer base, making it a strong indicator of business health and customer satisfaction. This is a totally different meaning from the hearing protection definition.

Closing thoughts

NRR is a critical measure of success for SaaS and subscription-based businesses. It offers valuable information about customer loyalty, growth potential, and the overall health of your business.

To improve your NRR, focus on customer satisfaction, minimize churn, and optimize your upselling strategies. A high NRR is a sign of a healthy and thriving business.

Continuously monitor and analyze your NRR so you can gauge your company’s performance, identify problems, and create strategies for sustainable growth.