If you’ve been running a subscription-based business for a while, you’ve been tracking active users, customer success KPIs and customer attrition. Your team is working to retain active subscriptions while you’re monitoring churn rate. You’ve got all these numbers about customer behavior. Your churn rate doesn’t show you the effect on your recurring revenue. You know losing a premium plan subscriber will affect your cash flow more than a subscriber who cancels a basic plan. But churn rate alone can’t show you the direct impact on your company's growth.
Ready to cut to the chase?
The key metric you’re looking for is net revenue retention (NRR).
Net revenue retention is how much revenue you retain from existing customers in a given period. It’s measured to align with your monthly recurring revenue or annual recurring revenue. (ARR is strictly a metric for companies using subscription revenue, as opposed to a revenue run rate, which is merely annualizing any revenue data.) NRR gives you a panoramic view of what’s working in your retention efforts based on earnings from upgrades, cross-sales, downgrades, and cancellations. You could look at net revenue retention as a measure of your predictable revenue in a given fiscal period.
Here’s what’s so important: A healthy NRR says how profitable your customer relationships really are.
By taking in all these inputs, NRR goes deeper than showing how good your platform company is at keeping customers happy or grabbing more loyal customers. A healthy revenue retention rate shows whether you’re building customer relationships that are profitable and, more importantly, can serve as a solid foundation for your growth.
Achieving strong net recurring revenue means prosperity, scalability, and growth potential.
More than new sales or customer churn, net revenue retention says whether you’re ready for a business expansion or if you need to keep fine-tuning that onboarding process. While new sales may seem like the backbone of expansion, that’s traditional thinking. Instead, delivering value to your current customers (rather than focusing on potential customers) is a more affordable approach to building net recurring revenue. That’s one lesson platform companies learned before any other businesses using their platforms.
Achieving a high NRR means you’re no longer relying on new sales to make up for churned income. Meanwhile, your revenue is compounding, and your subscriber base is growing.
Are revenue retention and subscriber retention the same? Not quite.
Let’s say you kept your customer base intact this year. Congratulations! You achieved a 100% subscriber retention rate. However, your loyal customers all decided to downgrade from your premium plan or they otherwise spent less on your services. See the difference? Your subscriber retention may be fine, but your revenue retention needs work.
Recommended reading: Recurly Research: Subscriber retention benchmarks
Cross-selling supplementary products
Monthly recurring revenue from issuing merchant cash advances
Unlike gross revenue retention, net revenue retention considers any action taken by current subscribers that impacts your income, such as
Monthly recurring revenue (MRR) from the previous month
Expansion revenue from upsells and cross-sells
Contraction revenue from downgrades
Revenue lost to churn
Let’s say you run a skincare subscription box company with three different memberships. You currently have 100 customers paying for a $50 monthly subscription to receive a customized product selection based on their skin needs.
Now, you’re at the end-month close of books. Here are the facts you’ll need to calculate your NRR:
15 subscribers upgraded to a $70 tier = $1,050
5 subscribers made single-product $15 purchases = $75
20 consumers downgraded to a $30 membership = $600
25 users canceled their $50 service = -$1,250
Then, calculate your total retained revenue with this net retention formula:
NRR = (MRR + Expansion Revenue - Contraction Revenue - Churned Customers) / MRR
For the skincare business example, that’s 100 subscribers already paying $50 for a $5,000 MRR. Now, see how the math flows:
Your NRR = (5,000 + 1,050 + 75 - 600 - 1,250) / 5,000
Your NRR = 85.5%
Is an 85% net revenue retention rate good? It depends. Customer and revenue retention rates vary significantly depending on the industry and target size. For example, SaaS companies reach greater than 100% rates. In contrast, retail stands at a 63% net revenue retention rate due to high competition and easy-leave businesses. Meanwhile, media brands enjoy an 84% NRR, and e-learning platforms face a 27% average NRR.
Consider adding a regular NRR metric to your current financial statements, if they’re not already included.
Now, there is one more factor you should use to study your NRR: Your business’s gross retention rate.
Subscriptions are a dynamic industry with fluid customer relationships.
Your ability to build your annual revenue will depend on how well you can analyze your company’s ability to both retain and expand your customer base.
Gross revenue retention (GRR): Shows your ability to retain customers. It’s the percentage of total revenue (without upgrades) minus churned revenue. Any growth potential from current accounts is not part of the equation.
Net revenue retention (NRR): Reflects your ability to retain and expand customers. It’s the percentage of total revenue (including upgrades) minus churned revenue from expirations, cancellations, and downgrades. You’re taking into account all legs of the customer journey that can increase a customer’s value to your company.
Choosing between these two revenue rates isn’t an either-or question. For the sake of your annual revenue, you and your financial services team need to calculate both. After all, distinguishing gross retention vs. net retention will provide deeper insights into your business’s success.
At first glance, it might seem like NRR is a more robust metric since it takes subscription upgrades and total product usage into account, right? And yes, those are meaningful figures.
However, GRR measures your business' long-term health—precisely because it doesn’t take into account that expansion to your monthly recurring revenue. Eventually, churn will erode business expansion and upsell opportunities. However, your operating expenses steadily rise. So, how reliable is your growth as a SaaS business? After all, you can’t make a growing SaaS purely on upfront payments and lump sum payments.
Comparing your NRR and GRR helps you analyze your growth trends in a new light.
For example, a 100% NRR with an 80% GRR indicates you’re financially stable and have growth potential. Your marketing tools are working to keep your customers engaged with the highest level of service appropriate to their needs.
On the other hand, a 100% NRR with a 60% GRR shows that your growth is less predictable within your current customer base. Your customer base may be just as engaged with all the services, but you’re losing less than half of them to churn.
Do you see now how understanding your NRR and GRR leads you to a deeper understanding of how well your business handles your customer relationships?
When you’re about to make a big decision about your business, a forecasting tool that can give you this kind of insight can show you how to make smart choices to improve your services while improving the user experience.
There are two complementary ways to improve your NRR: minimizing your churn and increasing your revenue. Solving one makes solving the other easier. And such a self-reinforcing strategy can help any SaaS company working to improve its growth rates.
Let’s get into three specific strategies to improve net recurring revenue for your SaaS company.
Churn is inevitable for any subscription business. However, when you don’t manage this customer attrition correctly, it results in revenue loss. Combating voluntary and involuntary churn will directly reflect on your revenue retention rate. Could you reach a possible negative churn? Perhaps.
Recover your failed transactions: There’s no more effective way to lower your churn rate than preventing and predicting recurring payment declines. Our Revenue Optimization Engine designs customized retry schedules for each transaction, helping your business recover >60% of failed renewals.
Manage your dunning effectively: Dunning campaigns are an excellent way to interact with subscribers while reminding them of failed transactions. Recurly helps you reach your target audience with a tailored message to encourage them to update their payment information.
Devote time to studying your customers’ needs. This prong of your strategy keeps your current accounts valuable. That means making sure the account is accurately sized to what your customer needed in the first place and paying attention to what they need now.
Optimize your onboarding process: This is the first approach a new subscriber has to your brand. It’s your chance to make a good impression. When it comes to crushing voluntary churn, a streamlined signup process and platform onboarding can lead to long-term relationships.
Offer long-term contracts to users: A common mistake companies make is offering monthly subscriptions only. Plan and billing flexibility allow customers to engage better with your product and, most likely, renew their subscription.
Enable subscription pauses: Accommodate your customers’ needs and you’ll see the improvements to your growth rates. Despite a short-term pause, letting your customers pause their subscriptions rather than cancel is an excellent way to improve retention in the long run.
Satisfied customers are more likely to spend 140% more when they’ve had a good experience. When designing or revamping your expansion strategy, aim at delivering an improved user experience rather than pushing price increases or service charges. You’ll find more successful opportunities to change your sales price as you prove your value to your customers.
Point to upgrade opportunities: Remind your subscribers why they should upgrade their plans. Consider attention-grabbing tactics like a pop-up or in-app messaging with call-to-actions whenever a customer clicks on a feature unavailable on their tier. In SaaS, your own platform company is your best marketing tool.
Identify one-time transaction opportunities: Map your average customer lifetime, from the first time they subscribe to a possible point where they turn into a churned customer. Listen to your customer base. They might tell you exactly what they’ll pay for.
Net revenue retention is one of the most effective ways to measure the impact of churn on your revenue. Improving your NRR can directly impact your SaaS business prospects as well as open new growth opportunities for you.
Recurly’s cutting-edge technology and data analytics improve billing continuity, payment decline recovery, and an average of 13% monthly revenue lift.