As SaaS companies grow and mature, it becomes increasingly important for them to track their revenue retention, which is the percentage of revenue that a company retains from its existing customers over a certain period of time. This metric is essential for measuring the health of a SaaS business, as it indicates how much value the company is delivering to its customers and how much it is able to monetize that value over time.
Traditionally, SaaS companies have focused on gross revenue retention (GRR), which measures the percentage of revenue retained from all customers, including those who churned and then later returned. However, in recent years, there has been a shift towards a more nuanced metric called net revenue retention (NRR), which only includes revenue from customers who have not churned. In this blog post, we will discuss why NRR is more important than GRR for SaaS companies and how it can help them to achieve sustainable growth.
What is Net Revenue Retention (NRR)?
Net Revenue Retention (NRR) is a measure of the revenue a SaaS company retains from its existing customers after accounting for cancellations, downgrades, and upgrades. Essentially, NRR looks at the revenue generated from customers who are still actively using the product or service. To calculate NRR, you would take the revenue generated from a cohort of customers at the beginning of a period (e.g. a year), and then subtract the revenue lost from customers who canceled or downgraded their subscription during that period. Finally, you would add the revenue gained from customers who upgraded their subscription during the period.
NRR is a more refined metric than GRR because it takes into account changes in the revenue generated by individual customers over time. It allows SaaS companies to see how much revenue they are generating from their existing customers and how much they are losing due to churn or downgrades. By tracking NRR, companies can identify areas where they need to improve their product or service, as well as identify opportunities for upselling and cross-selling.
Why NRR is More Important than GRR for SaaS Companies
While GRR is still a useful metric for SaaS companies, NRR is becoming increasingly important. There are several reasons why NRR is a better metric for measuring the health of a SaaS business.
First, NRR provides a more accurate picture of the company’s revenue growth. GRR can be misleading because it includes revenue from customers who churned and then later returned. Considering your churned users can get to a significant percentage, it’s definitely something you should consider in your calculations. While this may look good on paper, it does not necessarily indicate that the company is delivering value to its customers. NRR, on the other hand, only includes revenue from active customers, which means that it reflects the company’s ability to retain its customers and generate revenue from them over time.
Second, NRR is a better indicator of customer satisfaction. By focusing on revenue generated by active customers, NRR takes into account the value that the company is delivering to its customers. If a company has a high NRR, it indicates that its customers are satisfied with the product or service and are willing to continue paying for it. If NRR is low, it may indicate that the company needs to improve its product or service to better meet the needs of its customers.
Third, NRR provides a clearer picture of the company’s revenue potential. By tracking NRR, SaaS companies can identify opportunities for upselling and cross-selling to existing customers. This is important because it is much easier and more cost-effective to sell to existing customers than to acquire new ones. If a company has a high NRR, it indicates that there are opportunities to increase revenue from existing customers through upselling and cross-selling.
Fourth, NRR is a better indicator of long-term growth potential. While GRR can fluctuate from quarter to quarter, NRR provides a more stable measure of a company’s revenue retention over time. By focusing on revenue generated by active customers, NRR provides a more accurate picture of a company’s ability to generate sustainable growth over the long term.
Fifth, NRR takes into account changes in customer behavior over time. GRR does not account for the fact that some customers may downgrade their subscription or change their usage patterns over time. NRR, on the other hand, reflects changes in customer behavior and allows companies to adapt their strategies accordingly. By tracking NRR, SaaS companies can identify trends in customer behavior and adjust their product or service offerings to better meet the changing needs of their customers.
How SaaS Companies Can Improve NRR
Improving NRR requires a deep understanding of customer needs and behaviors. SaaS companies can take several steps to improve their NRR, including:
- Providing exceptional customer service: Happy customers are more likely to stick around and recommend your product or service to others. Providing exceptional customer service can help to improve customer satisfaction and reduce churn.
- Offering targeted upgrades and add-ons: SaaS companies should offer upgrades and add-ons that are tailored to the needs of their customers. By offering targeted upgrades, companies can increase their NRR by generating additional revenue from existing customers.
- Regularly updating and improving the product or service: SaaS companies should constantly be improving their product or service to better meet the changing needs of their customers and thus, increase customer satisfaction and reduce churn.
- Investing in customer success: SaaS companies should invest in customer success programs to help their customers get the most out of their product or service. By helping customers to achieve their goals, companies can increase customer satisfaction and improve NRR.
- Track customer usage and satisfaction: From product-led revenue platforms to expensive BI teams, to simple NPS surveys, tracking customers’ activity and happiness is critical for building a solid growth strategy.
In conclusion, while gross revenue retention (GRR) has been the traditional metric for measuring revenue retention for SaaS companies, net revenue retention (NRR) is becoming increasingly important.
NRR provides a more accurate picture of a company’s ability to retain its customers and generate revenue from them over time. To improve NRR, SaaS companies should focus on providing exceptional customer service, offering targeted upgrades and add-ons, regularly updating and improving their product or service, investing in customer success programs, and tracking their users’ activity and satisfaction. By doing so, they can improve customer satisfaction, reduce churn, and increase their revenue retention over time.