What is net revenue retention and how do businesses use it?
What is net revenue retention?
Net revenue retention (NRR) is used to measure how well a company can retain customers and grow revenue from its existing customer base. Net revenue retention is often measured by companies that rely on recurring revenue, such as SaaS and subscription companies.
NRR helps companies, and investors, understand how a company’s products and services are meeting customer needs. To improve net revenue retention, companies can focus on upselling to existing customers, reducing customer churn, improving customer experiences, and further developing products and services.
What is a good net revenue retention rate?
A high net revenue retention rate indicates that a company is successfully retaining and growing its customer base, while a low rate may indicate that the company is losing customers or has customers that are downgrading their services. An NRR rate above 100% is a good growth indicator for enterprises, while 90% for small to medium-sized enterprises would be considered great.
A lower net revenue retention rate does not necessarily mean that a business is struggling. A lower NRR rate could be the result of a company investing in customer acquisition, which could lead to a lower retention rate in the short term, but a higher rate in the long term.
How do you calculate net revenue retention?
Net revenue retention is calculated by taking monthly recurring revenue (MRR) at the beginning of the period, subtracting lost MRR and downsell MRR (downgraded services), and adding upsell MRR (upgraded services). Then you divide that number by your MRR at the beginning of the period.
Here is an example of the net revenue retention formula: if your monthly recurring revenue (MRR) for the start of the period is $100,000, and you subtract $5,000 in lost MRR and $5,000 in downsell MRR, then add $10,000 in upsell MRR, you get $100,000. If you divide that by your starting MRR ($100,000), you get 1, which is a net revenue retention rate of 100%.
Why do SaaS and subscription companies measure net revenue retention?
NRR is an important metric for SaaS and subscription companies because it helps them measure their ability to grow revenue from their existing customer base. These types of companies depend on a steady stream of recurring revenue, and their revenue retention rate can help them predict revenue growth so they can plan accordingly.
A low net revenue retention rate may indicate that there are issues with their product or services, customer support, or the overall customer experience. By tracking NRR, SaaS and subscription companies can identify these issues and make plans to address them.
What can businesses do to improve their net revenue retention rate?Since net revenue retention measures how well a company can grow revenue from existing customers, improving NRR can involve a number of processes across the organization. A key factor in improving NRR is customer satisfaction with products and services. Customer satisfaction can be determined through surveys and data from customer support, and it can also be understood through granular data about how customers use your products or services. Companies should monitor and analyze customer data to identify patterns and trends that can help them reduce churn and improve upsells. Understanding customer behavior and preferences can also help companies personalize the customer experience and improve customer satisfaction. Companies should also consider their pricing strategy and make sure that it is designed not only to attract new customers but also retain them. This might involve offering loyalty discounts, flexible pricing or attractive upsells for long-term customers.
What are the data challenges in improving net revenue retention?
Your net revenue retention rate can be a key indicator of whether your company has a problem with customer churn, or customers downgrading how they use your services. To improve NRR, however, you need detailed data about how customers are using your services. It can often be a challenge for companies to process this customer data in real time, in order to spot trends and take appropriate action.
Net revenue retention also indicates how successful a company is at upselling its services. Similar to churn and downsells, companies often lack real-time data that informs them about which customers to target upsells to, and when is the right time to do it. This is particularly relevant to companies offering usage-based pricing, since increasing customer usage can be a strong signal that it is time to offer an upsell.
Strategies to reduce churn or offer upsells often involve different business systems across an organization, which can be difficult to integrate. Companies must be able to collect and process customer usage data, then send that data to different systems for billing, analytics and marketing. Companies with usage-based pricing also need to track usage data to ensure customers do not exceed their usage limits.
How does DigitalRoute help companies improve net revenue retention?DigitalRoute’s software provides SaaS and subscription companies with granular data about how customers are using their product and services. This data can be used to reduce churn, increase upsells and offer new types of pricing. How does it work? DigitalRoute Usage Engine collects service usage data in real time, enriches it with data from other systems, then sends clean records to your business systems. Companies use DigitalRoute to improve customer experiences, offer flexible pricing, and make billing processes more efficient.
Learn more about how DigitalRoute improves billing processes
Improve customer experiencesWith detailed insights on customer behavior, you can offer upsells at the right time and reduce churn. You can also learn which services are growing or shrinking in popularity so you can improve your services.
Offer flexible pricingOur software is purpose-built to solve the data challenges of subscription and consumption-based models. With real-time data processing, you can grow revenue by charging for different levels of usage.
Improve billing efficiencyMultiple billing processes can lead to delays and an inability to send a single invoice for several services. DigitalRoute’s software solves this by acting as router between your data sources and business systems.
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