Business is all about growth, isn’t it? Healthy, sustainable growth.
At least for me it is. I jumped into the game of business to build something, to make something out of nothing. To grow a business. And I love the challenge of it.
Growth is a great form of feedback. It tells me if I’m creating something useful or valuable. On the other hand, a business that isn’t growing says something too. It tells me some things need to be addressed.
So, how do we know if we have healthy, sustainable growth? You have to measure for growth specifically. As many have said, you can't manage what you can’t measure. So, let's look at how to measure business growth.
Net Revenue Retention (NRR) measures healthy growth
A LOT of insightful posts have already been made about Net Revenue Retention (aka NRR, Net Dollar Retention, and NDR). And many of these posts were by thought leaders who have been in the SaaS game for a long time.
For instance, the folks at Insight Partners claim that business growth depends on net retention (or, more specifically, net retention rate). They show how companies with high Net Dollar Retention (NDR) enjoy both faster growth and more efficient growth.
In Jason Lemkin’s post about How to Build a $100+ Billion SaaS Company, he stated that “Net Revenue Retention is the #1 most important metric in SaaS.” Jason believes that revenue from current customers (aka NRR revenue) is more important to growth than revenue from new customers. I’ll explore why this might be true in more detail below.
Finally, Tomasz Tunguz succinctly made the case for optimizing NRR when he explained how a 20% increase in NRR leads to a doubling of company ARR in 5 years! Talk about real growth.
So how do you calculate Net Revenue Retention (NRR)?
One of the beautiful things about NRR is how simple the NRR formula is.
A few things to keep in mind:
- Technically, NRR is a rate. So, I suppose it should be NRR rate (or NRRR), but it’s often shortened to just NRR. This is true for Net Dollar Retention as well (e.g. Net Dollar Retention rate).
- Starting Revenue can be for any timeframe (month, year, etc.), so long as it is consistent on both the top and bottom of the equation.
- Expansion Revenue includes new revenue from cross-sells, upsells, and contract expansions.
- Churn Revenue includes lost revenue from downgrades, closed accounts, or contract contractions.
- Because NRR and NDR are the same thing, this is the Net Dollar Retention formula as well.
- Finally, NRR is a non-GAAP metric. This means there is not a standard equation. Publicly held companies usually create a formula that is tailored to their business. So, you might find slightly different formulas for this metric.
Net Revenue Retention (NRR) is immensely valuable for many reasons
For me, there are four reasons why NRR is a key SaaS metric:
1. NRR is a comprehensive, business-level metric that can serve as a guide to teams across the business
Look, some metrics can be used to guide the entire business. Others are more suited for individual teams. NRR is without question a metric for the entire business.
One reason I argue NRR is a business-level metric is because it tracks revenue from existing customers. And this is such a large and important part of the business. Also, NRR is very versatile. It can be used by different teams for different purposes.
For instance, if your Revenue or Operations teams want to track Annual Recurring Revenue (ARR), you can pull this from the numerator of the NRR rate formula shared above. You can see the ARR formula here:
Although there has been some debate about NRR vs ARR and their usefulness, it is a bit of a moot discussion. Because if you track NRR, you have ARR embedded within. So you get two for one.
Another example of an embedded metric is Gross Revenue Retention (GRR). Maybe your Customer Success team owns GRR. Jason Lemkin recently advocated this makes the most sense.
So, in this case, you can pull GRR from NRR by simply removing the Expansion Revenue piece. This also makes a NRR vs GRR conversation (i.e. net retention vs gross retention) moot.
Here is a look at the Gross Revenue Retention formula:
Similarly, you can track Expansion Revenue for your Sales or CS team--or whichever GTM team is responsible for your expansion revenue. Simply remove Churn Revenue from ARR:
The fact that multiple metrics exist within the NRR formula is helpful. For a few reasons.
First, if you are not hitting your NRR benchmark, you can easily break apart the formula. Then find where there is opportunity to improve. The team responsible for that sub-metric can go to work.
Second, each metric found in NRR can be owned by different teams across your organization. This gives each team something specific to own. It also gives each team something that rolls up to a common business goal. That kind of alignment is priceless.
2. Net Revenue Retention (NRR) drives company value
Of course, there’s the anecdotal evidence that companies with high NRR have created a lot of value. Snowflake had an NRR of 158% at the time of its IPO. And Figma had an NRR of 150% when it was acquired by Adobe.
Beyond this anecdotal evidence, there is also data that suggests NRR is responsible for explaining half of all Enterprise Value!
And this makes sense, really. Enterprise Value is directly tied to revenue. The more revenue a company generates, the greater their value.
As I mentioned above, Jason Lemkin believes that revenue from current customers is more important than revenue from new customers. That is a massive claim! But Jason backs it up by showing what he means:
That first line crazy. Read it again and let it sink in. With 120% NRR, you could get no new customers and still double your revenue in 5 years. Crazy! And amazing!
But Jason’s tweet does beg the question: what is a good NRR? Don’t take a single person’s opinion of what your target NRR should be. Check industry benchmarks. They will guide the way. Luckily…
3. It’s increasingly easy to find industry benchmarks for Net Revenue Retention (NRR)
Not too long ago in the world of SaaS metrics, LTV:CAC was the bee’s knees (What's wrong with bee’s knees? We’re in the Roaring ‘20s again, aren’t we?).
People liked the LTV:CAC ratio because it measures the Customer Lifetime Value (LTV) to Customer Acquisition Cost (CAC). This helped people gauge the unit economics of a business.
Conventional wisdom said if your LTV:CAC ratio was 3+, you were in good shape. But we all know how dependable conventional wisdom can be. And because most companies don’t share their LTV or their CAC it is near impossible to find reliable benchmarks that can be applied to your unique business situation.
However, now it's easy to find benchmarks for NRR. So, you can now skip the guesswork. Check out these great benchmark resources:
- In SaaS Capital’s 2020 B2B SaaS Metrics survey results, SaaS Capital asserts that the biggest predictor of target NRR rate is Annual Contract Value (ACV). And they share a chart to help you benchmark where your NRR should be according to your ACV.
- KeyBanc shares results from an annual survey of privately held SaaS companies. You’ll find the average NDR on page 25 of their 2021 SaaS Survey results.
- In recent years, many publicly held SaaS companies have been sharing their NRR/NDR rate. KeyBanc has made it easy to find this information by compiling the data shared by public companies. As noted above, most companies create a formula that is tailored to their business. But KeyBanc removes some of the confusion by sharing both the specific formula used by each company and the company’s rate at IPO.
Altogether, this information is invaluable. Just a few years ago we relied on conventional wisdom to know what a good NRR was. Now, you can easily find NRR benchmarks that reflect your business model, ACV, industry, etc. I can't overstate how helpful this is.
4. Net Revenue Retention (NRR) is a key SaaS metric because it measures healthy, sustainable business growth
The reason NRR can be relied on to measure healthy growth is because it includes customer retention revenue and customer expansion revenue. In other words, NRR measures revenue from current customers. And as Jason Lemkin asserts, business growth depends on revenue from current customers.
But why does sustainable business growth depend on revenue from current customers?
First, maximizing revenue from current customers both reduces costs and boosts profits.
According to this HBR article, it can be 5 – 25 times more expensive to acquire customers than it is to retain existing ones. Talk about low hanging fruit!
Along these lines, the 2021 KBCM SaaS Survey shows on average it costs $1.67 to generate $1 from a new customer (p.42). Whereas it costs $0.63 on average to generate $1 of cross/upsell revenue from an existing customer.
If you told me for every $0.63 I gave you, you’d give me $1 in return, I’d have two questions for you. How many times can I do this? And where do I sign up?
Next, it’s possible to see the biggest revenue gains from your current customer set.
Logically, it holds that you’ve already won the hearts and minds of your current customers. You’ve proven your mettle, so to speak. They are likely to believe your claims and trust you to provide more value. This is a great example of “getting a running start”. And who doesn’t love a running start?
Of course, beyond the logic, there is the oft quoted Bain study that found “a 5% increase in customer retention produces more than a 25% increase in profit” for financial services firms. This provides tangible evidence there is a big payoff in customer retention.
Finally, maximizing value from your existing customers paves the way for a heavy investment in customer acquisition.
I think we can all agree that no matter how big your market is, there is a finite limit to it. There is not an endless supply of new customers available to you. So, it makes sense to maximize your engagement with every one of your existing customers.
That said, it’s impossible to reach your full business growth potential without acquiring new customers. The only caution is if you focus on acquisition before you’ve solved for retention and expansion, you could end up with a leaky bucket problem.
Therefore, it just makes sense to use NRR as a key metric to monitor your retention and expansion. Then you can ensure you’ve reached your benchmark NRR rate before pouring fuel into your acquisition efforts. And you’ll know you are set up to fully leverage every new customer you acquire.
Tingono’s mission is to make it easy to boost Net Revenue Retention
There is no question that Net Revenue Retention is critical to build and grow a healthy SaaS business. This truth is the core of Tingono. In fact, we’re on a mission to make it easy for everyone to boost NRR through machine learning and automation.
Our ultimate goal is to make it easy for you to retain revenue and expand customer accounts.
Tingono makes recurring revenue growth epic. Our NRR platform provides three things to help you drive more revenue.
First, our 360° customer view shows all your meaningful customer activity in one place. Now you don't have to search all over just to figure out what a customer is doing.
Second our ML models are customized for your business. So you get very accurate predictions of cross-sells, upsells, downgrades, and churn. And your team can now be laser-focused on key opportunities and risks.
Finally, we automate and orchestrate recommended next steps. This means things like ready-made talk tracks and customer-specific messaging so your team can act on our predictions with precision and speed.
In a nutshell, we use your customer data to boost your Net Revenue Retention, which translates to significant revenue growth.
We’d love to show you how our solution will help you increase your Net Revenue Retention. Please get in touch!
