Net Revenue Retention (NRR)
Net Revenue Retention (NRR) Overview
Alternative Name: Net Dollar Retention (NDR)
Net Revenue Retention (NRR), also known as Net Dollar Retention (NDR), measures the percentage of recurring revenue retained over a specific period. NRR captures lost revenue due to customer attrition, reduced usage, or decreasing subscription level, offset by increased revenue from existing customers through up-sells, cross-sells, price increases, or increased usage. The term “net” is used because lost revenue is “netted” against expansion revenue
Business Value and Insights
Net Revenue Retention (NRR) measures the stability of a SaaS business's revenue as it measured retention on a revenue basis (versus logo count) and also includes future potential growth potential from new customers. SaaS businesses with high NRR are more predictable (safer) and have higher growth potential because either churn is not a significant drain on revenue.
Customer revenue churn and down-sells are the drivers of NRR to the downside, but it can be offset by effectively increasing revenue from existing customers. Companies with higher NRR tend to have lower customer churn levels and healthy expansion revenue from existing customers. NRR is typically greater than 100% but can be less than 100% for companies whose revenue from existing customers is shrinking or they have limited expansion revenue.
MRR at the end of accounting period from the cohort of customers at the beginning of the period
MRR from the customers at the beginning of accounting period
The cohort method is the most accurate way to measure NRR and is the preferred approach in most situations. The cohort method compares the recurring revenue of a specific group of customers over time, most commonly on an annualized basis. If measured over a year for example, the metric compares the MRR from a year ago, with the MRR of those same customers today. Any new customers acquired over the year are excluded from the calculation.
For this calculation, it’s important to use revenue and not bookings, billings, or cash accounting. Monthly Recurring Revenue (MRR) is commonly used for this calculation and is suitable for a wide range of companies. Enterprise SaaS companies with longer contracts and implementation cycles can also use Annual Recurring Revenue (ARR) or Contracted ARR (CARR).
If using CARR, the metric will capture churn that occurs during the implementation cycle.
Data Inputs Required
Data Input #1: MRR by customer at the beginning of the measurement period
Data Input #2: MRR by customer for the same group of customers at the end of the measurement period
This data to calculate NRR is typically found on a revenue recognition schedule. If using CARR, that value might be found in the CRM or contract management system.
Net Revenue Retention
= 102% Net Revenue Retention
As you can see in the sample calculation, some customers churned, some contracted, and some expanded. The net effect was the retention of 102% of the revenue from the prior year.
The time period between the beginning MRR and ending MRR (for the same set of customers) is typically one year.
Using NRR as an annual measurement is the most intuitive and easy to benchmark.
If the calculation period is less than one year, it can be annualized by taking the result to the appropriate power. For example, if measured over a quarter, take the result to the 4th power, and if measured over a month, take the result to the 12th power.
Generally speaking, longer measurement periods yield the best results for long sales-cycle companies with larger annual or multi-year contracts, and shorter measurement periods are a better fit for companies with smaller contract values and shorter sales-cycles.
Regardless of the measurement period, the metric is typically calculated every month on a rolling basis.
Nuances To Consider
Nuance #1: The cohort approach is considered more accurate than the formula approach.
Nuance #2: The cohort approach does not require separate tracking of Cross-Sells, Up-Sells, or Down-Sells.
Nuance #3: Revenue recognition accelerated due to a canceled contract should not be included in the beginning or ending MRR.
Nuance #4: Win-Back Period" is the timeframe a company views a non-renewal as still possible and would count the ultimate re-start of the agreement as a renewal versus a new csutomer. Most companies define a “win-back” period of 30 - 90 days. If a churned customer renews within the win-back period, the resulting revenue is counted as a renewal and not a new sale.
Nuance #5: Using CARR for the calculation captures the churn of customers who cancel after signing their contract but before implementation and revenue recognition. Therefore, companies with long implementation cycles will find CARR most useful.
Nuance #6: There is debate on the inclusion of usage-based pricing revenue greater than the committment level (overages) in the NRR calculation. If variable revenue is significant and included, NRR becomes more of a revenue metric versus recurring revenue growth metric than a metric that demonstrates the stability of the recurring revenue stream. Regardless, if variable revenue from usage-based pricing is included in the calculation, it should be clearly highlighted and consistently applied in all revenue based retention metrics.
Nuance #7: The cohort approach's main drawbacks are: 1) It does not capture the retention performance of recently acquired customers: 2) It may not be helpful for a very early stage company with few or no customers older than one year