Net Revenue Retention and Why It Matters

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In this arti­cle, I’ll define net rev­enue reten­tion, show you how to cal­cu­late it, explain why it’s impor­tant, and show you how to use it to man­age your SaaS com­pa­ny.

What Is Net Revenue Retention in SaaS?

Net rev­enue reten­tion (NRR) is a key per­for­mance indi­ca­tor that mea­sures the com­bi­na­tion of two things:

  1. How well you retain your cus­tomers (by pre­vent­ing them from churn­ing or can­cel­ing their sub­scrip­tions)
  2. How well you upsell your exist­ing cus­tomers (and gen­er­ate incre­men­tal rev­enue from exist­ing accounts)

The “rev­enue reten­tion” part of net rev­enue reten­tion refers to the amount of rev­enue you col­lect­ed from accounts at the start of a month com­pared with the rev­enue col­lect­ed the fol­low­ing month from the same accounts. Any accounts added dur­ing the month are exclud­ed from the cal­cu­la­tion.

For exam­ple, if you have 100 accounts that pay you $1 on the first day of Jan­u­ary, you have $100 in rev­enue for Jan­u­ary. In Feb­ru­ary, if all 100 accounts decid­ed to stay sub­scribed and again paid $1, you have 100% rev­enue reten­tion for Feb­ru­ary.

The “net” part of net rev­enue reten­tion refers to an increase in rev­enue from exist­ing accounts dur­ing the month.

For exam­ple, let’s say you have 100 accounts that paid you $1 in June. You have $100 in rev­enue in June from those accounts. In July, you still had those 100 accounts. How­ev­er, because you worked on a cross-sell­ing/upselling sales effort, you got those 100 accounts to pay you an aver­age of $1.10. You have $110 in rev­enue in July from those 100 accounts that you inher­it­ed from June. In this sce­nario, your net rev­enue reten­tion is 110% (The Math: $110 in rev­enue in July / $100 in rev­enue in June).

Note: Net rev­enue reten­tion is typ­i­cal­ly cal­cu­lat­ed on either a month­ly or annu­al basis. Both approach­es are cor­rect so long as you dis­close the time peri­od uti­lized. If used in a month­ly con­text, label your dash­board “Month­ly NRR.” If you cite these met­rics in a board of direc­tors doc­u­ment, you might cite “Annu­al Net Rev­enue Reten­tion.”

How Do You Calculate Net Retention?

Net rev­enue reten­tion is cal­cu­lat­ed as fol­lows: For a par­tic­u­lar cohort of cus­tomers (such as all cus­tomers who were active­ly pay­ing in Jan­u­ary 2021), you take their Jan­u­ary 2022 rev­enues and divide them by their Jan­u­ary 2021 rev­enues. The answer is then expressed as a per­cent­age.

The key is to inten­tion­al­ly exclude cus­tomers you acquired from Feb­ru­ary through Decem­ber of 2021. The idea is to see how much rev­enue you retained from that cohort of cus­tomers a year lat­er and how much more you sold to those same accounts.

Net rev­enue reten­tion rates over 100% are excel­lent, as this indi­cates that your com­pa­ny can grow per­pet­u­al­ly with­out ever acquir­ing a new cus­tomer.

For help cal­cu­lat­ing net reten­tion, Click Here to Down­load my Net Rev­enue Tem­plate.

What Is Good Net Retention?

For a B2B SaaS com­pa­ny focus­ing on For­tune 500 com­pa­nies, a good gross reten­tion rate is 98% per year, and a good net reten­tion rate is 110%+ per year.

If the B2B SaaS com­pa­ny focus­es on small busi­ness cus­tomers, a good gross reten­tion rate is 80% per year, and a good net reten­tion rate is 90%+ per year.

Why Is NRR Important?

Net rev­enue reten­tion is the sin­gle best lead­ing indi­ca­tor of whether a SaaS company’s rev­enue will sky­rock­et or hit a ceil­ing.

Here’s why.

The SaaS and oth­er recur­ring rev­enue busi­ness­es are high­ly sen­si­tive to churn. If cus­tomers sub­scribe and then churn out, your busi­ness rev­enues auto­mat­i­cal­ly shrink over time.

How­ev­er, if your net rev­enue reten­tion is in excess of 100% (which is stel­lar), that means that even if you don’t add any new cus­tomers, your rev­enues will, in the­o­ry, keep on grow­ing for­ev­er. Math­e­mat­i­cal­ly, the rev­enue ceil­ing for your SaaS busi­ness is infi­nite.

This is why SaaS com­pa­nies with high net rev­enue reten­tion rates (indi­cat­ing exist­ing cus­tomers don’t leave and also increase their spend­ing each month) and high new cus­tomer acqui­si­tion rates (who sub­se­quent­ly become exist­ing cus­tomers the fol­low­ing month) will often get sky-high val­u­a­tions. This is where “uni­corn” SaaS com­pa­nies with enter­prise val­ues over $1 bil­lion come from.

Net Revenue Retention — Exponential Growth vs. Decay Chart

To appre­ci­ate this math­e­mat­i­cal trait of high net rev­enue reten­tion, let’s say your SaaS com­pa­ny has $10 mil­lion in annu­al recur­ring rev­enue (ARR). We’ll fur­ther assume that your com­pa­ny will not ever acquire any new cus­tomers again.

Let’s imag­ine what hap­pens to your ARR under two dif­fer­ent sce­nar­ios.

Sce­nario 1: 60% NRR

Sce­nario 2: 140% NRR

Intu­itive­ly, we know that high­er net rev­enue reten­tion is bet­ter. But how much bet­ter is it real­ly?

In both sce­nar­ios, annu­al recur­ring rev­enues in year one are $10 mil­lion.

Guess what annu­al recur­ring rev­enues will look like in five years, ten years, and 15 years…

Let’s take a look:

At 60% NRR, your com­pa­ny drops from $10 mil­lion to $1 mil­lion in five years. In com­par­i­son, if you have 140% NRR, your com­pa­ny grows from $10 mil­lion to $38 mil­lion.

SaaS Net Revenue Retention Comparison - 5 Years

At 60% NRR, your com­pa­ny drops from $10 mil­lion to $100 thou­sand by the ten-year mark. In com­par­i­son, if you have 140% NRR, your com­pa­ny grows from $10 mil­lion to $207 mil­lion in ARR.

SaaS Net Revenue Retention Comparison - 10 Years

At 60% NRR, your com­pa­ny drops from $10 mil­lion to near­ly $0 well before you hit the 15-year mark. In com­par­i­son, if you have 140% NRR, your com­pa­ny grows from $10 mil­lion to $1.1 bil­lion in ARR.

Keep in mind that this is $1.1 bil­lion in rev­enue assum­ing you acquire zero new cus­tomers over 15 years. Need­less to say, the math is breath­tak­ing.

Line chart comparing SaaS net revenue retention at 60% vs 140% over a 15-year period, showing exponential revenue growth with higher retention

This is why ven­ture firms, pri­vate equi­ty firms, and pub­lic share­hold­ers val­ue com­pa­nies with high net rev­enue reten­tion. Once your NRR is over 100%, the growth is mete­oric even with zero new cus­tomer acqui­si­tion.

In essence, once your net rev­enue reten­tion exceeds 100% and stays there, it is math­e­mat­i­cal­ly impos­si­ble for your annu­al recur­ring rev­enue to shrink.

Additional Resources

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author avatar
Vic­tor Cheng
Author of Extreme Rev­enue Growth, Exec­u­tive coach, inde­pen­dent board mem­ber, and investor in SaaS com­pa­nies.
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