What is & how to calculate net revenue retention
When running a subscription-based business, fighting against churn is one of your everyday battles. Even though customer acquisition is a major need to scale a business, the ability to retain existing ones is easier and less costly. Here is where tracking revenue retention comes in handy.
What is net revenue retention?
Net Revenue Retention (NRR) rate is the percentage of revenue retained from existing customers in a specific period—monthly or annually. It reflects how successful your company is at generating additional revenue from your existing customers, considering the income from upgrades, cross-sales, downgrades, and cancellations.
Is NRR the same as subscriber retention? Not necessarily. For example, if your company retains all of its customers in 2022, but they all downgrade their plans and spend less than in the previous year, your revenue retention rate will be lower, but your subscriber retention rate remains the same.
Why is NRR important in the subscription industry?
It’s a simple reason–NRR measures customer success and business health. Companies need solid foundations to grow upon. Low revenue retention means your company relies on net new sales to make up for churned income, while high NRR means your revenue is compounding, and your customer base is growing stronger.
How do you calculate revenue retention?
When calculating net revenue retention, it’s important to consider any action taken by current subscribers that impacts your income. Use the following values:
Monthly or Annual Recurring Revenue (MRR/ARR) from the last period
Expansion revenue from upsells and cross-sells
Contraction revenue from downgrades
Revenue lost through churn
Once you’ve gathered all the data, apply this formula:
NRR = (MRR + Expansion Revenue - Contraction Revenue - Churned Customers) / MRR
Let’s say you have 100 customers, each one paying a $50 monthly subscription. This month, 40 customers renewed their current plan, 10 upgraded to an $80 package, 20 decided to downgrade to a $30 tier, and another 20 canceled your service. Then, your retention rate should be:
NRR = (5,000 + 800 - 600 - 1,000) / 5,000 = 84%
The median NRR ranges across on industry and target size. For example, retail stands at a 63% NRR due to high competition and easy-leave businesses, media and entertainment reach an 84% NRR thanks to large retargeting budgets, while education technology companies have a healthy NRR of 27%.
Increasing your net revenue retention
Overall, there are two ways of approaching NRR–by optimizing expansion revenue and reducing your churn.
Expand your revenue
Encourage upsells: Remind your customers why they should upgrade their plans. Consider simple tactics like pop-up or in-app messaging with attractive call-to-actions whenever a customer clicks on a feature unavailable on their tier.
Offer long-term contracts to users: One of the primary mistakes companies make is offering monthly subscriptions only. Quarterly or yearly options allow customers to familiarize themselves better with your services. Once they start enjoying their package benefits, most likely, they’ll stick with you in the long run.
Reduce your churn
Optimize your onboarding process: This is the first contact a new customer has with your service–it’s your chance to make a good impression. A streamlined signup process that focuses on showing value to your customers leads to long-term relationships with subscribers.
Minimize failed transactions: Preventing payment declines and predicting recurring transactions effectively lowers your churn rate. Recurly’s Revenue Optimization Engine designs tailor-made retry schedules for each transaction, helping businesses recover up to 60% of failed renewals.
Manage your dunning: Dunning campaigns are an excellent way to interact with subscribers while reminding them of their failed transactions. Recurly helps you target the right audience, using the right message to encourage customers o update their payment information.
Satisfied customers are more likely to spend 140% more when they’ve had a good experience. So, when designing your expansion strategy, aim for value-creation rather than pushing subscription upgrades.