For subscription-based businesses, success hinges on more than just acquiring new customers. The real driver of sustained growth lies in nurturing recurring revenue through engaged and satisfied customers. For that, understanding the pulse of existing subscriber relationships is paramount.
Net Revenue Retention (NRR) is a crucial metric that unveils the true health and growth potential of a subscription-centric enterprise. NRR goes beyond traditional revenue metrics, offering a comprehensive view of how effectively a company is retaining and expanding its existing customer base.
In this blog, we shall understand the concept of Net Revenue Retention, exploring its significance and delving into the intricacies of calculating it.
What is Net Revenue Retention?
The Net Revenue Retention rate is a vital metric representing the percentage of revenue retained from existing customers over a specified period, whether monthly or annually. It offers insights into your company’s ability to generate additional revenue from its current customer base. NRR, however, excludes revenue contributions from new customers.
Various scenarios impact revenue from existing customers, such as:
– Customer churn
– Upgrading or downgrading subscription tiers
– Changes in product usage
– Alterations in the number of users
These instances directly influence the overall revenue generated each month or year. By incorporating these changes into the recurring revenues paid by customers, the Net Revenue Retention metric provides a comprehensive view of the revenue generated by existing customers.
While Net Revenue Retention measures the financial impact of changes in existing customer behavior, it differs from subscriber retention. For instance, if a company retains all its subscribers over a year, but they collectively downgrade their plans, resulting in reduced spending compared to the previous period, the revenue retention rate of the company may decrease, while the subscriber retention rate remains constant.
How to calculate NRR?
Net Revenue Retention (NRR) encapsulates the overall sum of expanded, retained, and contracted revenue within a designated timeframe, be it monthly or annually. The calculation of NRR involves assessing the total income, which encompasses revenue generated from expansions. From this, the net revenue churn is deduced, representing revenue losses attributed to contract cancellations, downgrades, and expirations.
The net revenue retention formula is expressed as follows:
NRR = (MRR + Expansion MRR − Churn MRR − Contraction MRR)/ MRR × 100
Here,
- MRR is the recurring revenue collected from the previous month’s customers.
- Churn MRR denotes the recurring revenue lost due to customer churn.
- Contraction MRR signifies revenue lost from existing customer downgrades.
- Expansion MRR represents revenue generated from existing customers through cross-sales and up-sales.
Suggested Reading: What is churn rate in the subscription business and how to calculate it?
NRR calculation example
Consider a company with a monthly recurring revenue of $60,000. Through effective upgrades and cross-selling strategies, they managed to increase their revenue by $7,000. However, they faced challenges as $2,000 resulted from customer downgrades and $1,500 from churn.
Applying the NRR formula:
(60,000+7,000−2,000−1,500)/60,000 x 100 = 105.83%
Now the question arises: What is a good NRR?
Generally, a 100% NRR is deemed satisfactory for SaaS or subscription-based companies, indicating a low churn rate and a stable customer base.
Analyzing NRR alongside the gross revenue retention metric provides valuable insights into a company’s profitability. A higher NRR is seen as a positive indicator of scalable and predictable growth, enhancing a company’s appeal to potential investors.
How to increase Net Revenue Retention
Enhancing the net revenue retention rate in your subscription model involves a strategic blend of optimizing expansion revenue and curbing churn. Here are five effective approaches to achieve this:
- Encourage Upsells: Prompt customers to upgrade their plans by highlighting the benefits. Implement tactics such as pop-ups or in-app messages featuring compelling calls-to-action when users interact with features beyond their current tier.
- Offer Long-Term Contracts: Extend beyond monthly subscriptions and provide users with options for quarterly or yearly commitments. Offering longer-term plans allows customers to fully immerse themselves in your services, fostering loyalty and increasing the likelihood of extended partnerships.
- Optimize Onboarding Processes: The initial interaction with your service sets the tone for the customer experience. Streamline the signup process, emphasizing the value your service brings. A smooth onboarding experience establishes the foundation for enduring relationships with subscribers.
- Minimize Failed Transactions: Proactively address payment issues to reduce churn. Employ tools like RackNap’s subscription management platform, which tailors retry schedules for each transaction. Customers say that RackNap has eliminated all their billing-related problems and rate it 9/10 on the recommendation scale.
- Effective Dunning Management: Leverage dunning campaigns to engage with subscribers and remind them of failed transactions. Utilize RackNap’s billing intelligence to target the right audience with the appropriate messages, encouraging customers to update their payment information and thereby minimizing potential revenue loss.
Satisfied customers are more likely to invest further after a positive experience. When shaping your expansion strategy, prioritize value creation over merely pushing for subscription upgrades. This customer-centric approach not only fosters loyalty but also contributes to the overall success of your subscription-based business.
Read Next: How best to retain your customers?
