Net revenue retention / Net retention rate (NRR)
Definition
Net revenue retention or Net retention rate (NRR) is a key metric for any subscription business. It's a measure of how much revenue a company retains from its customers on a net basis, after accounting for churn. In other words, it's a way to gauge whether a company is growing its business by acquiring new customers, or simply holding on to the ones it already has.
It is also commonly referred to as Net dollar retention, On the revenue side this includes expansion revenue (upsells, crossells) and the churn is formed from (cancellations, downgrades and contract expirations).
The Net revenue retention rate is a good way to measure a company's health over time. If a company is growing its business, you would expect to see a positive Net revenue retention rate. If a company is losing customers, you would expect to see a negative Net revenue retention rate.
There are a few things to keep in mind when interpreting Net revenue retention rates. First, it's important to remember that it only measures recurring revenue. It doesn't take into account one-time or non-recurring revenue. Second, the rate can be affected by changes in pricing. If a company raises its prices, it will likely see a decrease in its Net revenue retention rate, even if it doesn't lose any customers.
Finally, Net revenue retention rates can be affected by changes in the mix of customers a company has. For example, if a company acquires a new customer who has a higher churn rate than the company's average customer, that will likely impact the Net revenue retention rate.
How is Net revenue retention / Net retention rate (NRR) calculated?
Net revenue retention is the total revenue a business generates after customer churn, divided by the MRR at the start of the month
The formula for calculating Net revenue retention / Net retention rate (NRR) is:
NRR = (Existing MRR + Upgrades MRR - Downgrades MRR - Churn MRR) / Existing MRR *100
Example:
At the beginning of May your MRR is $12,000 and after expansions (upsells, crossells) during May it increases to $15,000. The churn for the month of May was $2,000.
This means that you end the month on $13,000. $15,000 MRR (including expansions) - $2,000 churn.
This $13,000 is divided by the original MRR of $12,000, which gives you a net revenue retention rate of 108.33%.
Why is Net revenue retention / Net retention rate (NRR) important to measure?
Net revenue retention is important because it is a key sign as to whether your company is growing. A positive net revenue retention is a sign that you have a low churn rate and are able to achieve positive growth through upsells and expansions.
What is a good net retention rate?
A good net retention rate is a rate that is above or around your industry standard. This varies from industry to industry. The key aim of your net retention rate is to be positive allowing you to grow.
What is the difference between GRR and NRR?
Let’s look at the 2 calculations side-by-side:NRR = (Existing MRR + Upgrades MRR - Downgrades MRR - Churn MRR) / Existing MRR *100GRR = (Existing MRR - Churn MRR) / Existing MRR *100Gross revenue retention focuses on how well a business retains existing customer revenue, but ignoring any upgrades and downgrades within the period. Whilst Net revenue retention includes both upgrades and downgrades within the rate calculation, to factor in how the business is retaining and expanding existing customer revenues.
