If you had to choose between two pills - one that ensured you had a constant flow of new customers and another that made sure that none of your existing customers churn, which would you pick? While the first pill might sound more appealing, a majority of founders would do well to pick the second pill. Customer acquisition has its fair share of hurdles, however retaining customers is possibly one of the most challenging aspects of sustaining a SaaS business. You could acquire as many customers as possible, but if your biggest accounts drop off frequently, you have a major problem on your hands. Remember that acquiring customers is more expensive than retaining them and the long term positive impact of retention is much higher on the company’s bottom line than new customer acquisition.
B2B SaaS founders must proactively track their retention levels from the start. Net Revenue Retention (NRR) is the key startup KPI that helps founders track how well they are retaining their existing paying customers. Let’s take a closer look to understand NRR thoroughly.
What is Net Revenue Retention (NRR)?
NRR is a KPI that calculates the percentage of revenue retained from existing customers over a specific period of time. It accounts for 3 components:
Revenue lost from customer churn
Revenue contraction due to downgrades from current customers
Revenue expansion due to upgrades from current customers
In addition to showing a startup’s ability to retain its customers, NRR is also an indicator of how efficient a startup is at generating additional revenue (i.e. upselling) from existing customers.
Filevine last month announced that the company achieved 138% net revenue retention in Q2. This was a record for the firm and a strong indicator that the company did exceptionally well in retaining revenue from existing customers.
How do you calculate NRR?
To calculate NRR for your startup:
Identify your startup’s monthly recurring revenue (MRR) at the start of the month (i.e. at previous month’s close).
Calculate the revenue movement resulting from upgrades, downgrades and churn.
Adjust the starting revenue for revenue movement (from step 2)
Lastly to get NRR: follow:
Here is an example:
How to interpret your startup’s NRR?
If we look at Filevine’s NRR of 138%, it means that on a net basis Filevine’s existing customers continue to purchase even more product/services from the company.
This implies that Filevine can continue to grow as a company even without acquiring new customers because it has the ability to generate more revenue from existing customers.
If NRR is below 100%, it signifies that the startup is losing revenue from existing customers, which is a result of downgrades or churns (or both).
If NRR is above 100%, it signals that the startup is earning more revenue from existing customers, which is a result of upgrades despite any downgrades/churn that might be occurring.
Why does your NRR rate matter?
NRR is a strong signal of the growth trajectory of a startup. In case of Filevine, a 138% NRR figure meant that existing customers purchased more licences and bought ancillary products, which extended their use of the platform.
A SaaS startup is highly susceptible to churn, It is common for customers to stop subscribing to a startup’s product/service. NRR enables the startup to monitor whether they are net positive or net negative with retention. A negative NRR implies that startup tends to lose the customers it acquires rather than grow its footprint with existing customers.
Ideally, founders should strive for a net retention rate above 100%. In such cases, the high rate is indicative of good customer retention and an increase in their spending each month as highlighted in the Filevine example.
What were the key factors that contributed to Filevine’s impressive NRR figure?
Acquisition – Filevine's acquisition of Outlaw and Lead Docket were instrumental in boosting NRR. Here’s what Filevine CEO Ryan Anderson had to say “Our 2021 acquisition of Outlaw and investments in talent, product and customer success have made Filevine the legal platform of choice for enterprises.”
Product expansion - Filevine also expanded rapidly into big law, insurance, defense, corporate, governmental and nonprofit legal counsel teams
Product improvements - They utilised funds from their latest round to roll out significant product improvements to billing, timekeeping, in-app emailing and the platform's user interface. This resonated well with their existing customer base and was an important driver of NRR.
What can B2B SaaS founders do to boost NRR?
In Filevine’s case, the company had the luxury of a new round of funding, which allowed them to heavily invest in resources (and acquisition) that would go on to boost their NRR. But most founders do not have the privilege of allocating massive amounts of money every now and then. Having said that, there are still many other effective ways to boost NRR. Let’s take a look at some of them:
Conducting cohort analysis to identify which customer segments have higher net revenue retention rates and then revising GTM strategies to focus resources on said customer segments
Regularly assessing pricing strategy to ensure that it is aligned with the value provided by the SaaS product
Strive to provide the best in class customer support to your users. Prioritise investments in customer success and try to build a customer support culture that leaves a good impression on your customer (hence drives strong retention)
Gain more granular insights into metrics like LTV and CAC so that leadership teams can make more proactive strategic decisions
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