Net revenue retention for subscription businesses

If you’ve been in the subscription industry for a while, you know that monitoring churn rate is key to scaling a business. Working to retain subscribers is crucial; however, churn rate doesn’t show the effects on recurring revenue per se.

Even though both are reported as churned, deserting big-ticket customers impacts revenue more than canceling subscribers who paid for a cheaper plan. To measure the weight of churn on earnings, you need to track your net revenue retention (NRR).

NRR in the subscription industry

Companies need solid foundations to grow upon, and a healthy revenue retention rate means prosperity and scalability.

While new sales may seem like the backbone of expansion, revenue retention results from a more affordable approach focused on generating income by delivering value to current customers. Achieving a high NRR means you’re no longer relying on new sales to make up for churned income, your revenue is compounding, and your subscriber base is growing stronger.

Understanding revenue retention

Net Revenue Retention is the amount of revenue retained from existing customers in a given period. It’s measured to align with your monthly or annual recurring revenue, providing a comprehensive view of retention efforts based on earnings from upgrades, cross-sales, downgrades, and cancellations.

Are revenue retention and subscriber retention the same? Not quite. Imagine you’ve kept all your customers this year, but they decided to spend less on your services or downgrade to lower tiers. In this scenario, your revenue retention rate is lower, but your subscriber retention rate remains still.

Recommended reading: Recurly Research: Subscriber Retention Benchmarks

Gross retention vs. net retention–which is better?

In a dynamic industry like subscriptions, it’s important to analyze your 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. 

  • 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, cancelations, and downgrades.

Choosing between these two metrics isn’t an either-or question. Instead, distinguishing gross retention vs. net retention provides deeper insights into subscription success.

At first glance, it might seem like NRR is a more robust metric since it takes upgrades into account. However, GRR measures your business' long-term health–churn will eventually erode expansion and upsell opportunities.

For example, a 100% NRR with an 80% GRR indicates you’re financially stable and have growth potential. Whereas a 100% NRR with a 60% shows that your growth is less predictable within your current customer base.

The net revenue retention formula explained

Net revenue retention considers any action taken by current subscribers that impacts your income, such as

  • Annual or monthly recurring revenue (ARR/MRR) from last period

  • 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. As you reach the end-month close, consider the following:

  • 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, use the net retention formula to calculate your total retained revenue.

NRR = (MRR + Expansion Revenue - Contraction Revenue - Churned Customers) / MRR

Where NRR = (5,000 + 1,050 + 75 - 600 - 1,250) / 5,000 = 85.5%

What is a good net revenue retention rate?

Customer and revenue retention rates vary significantly depending on industry and target size. For example, SaaS companies reach >100% rates. In contrast, retail stands at a 63% NRR due to high competition and easy-leave businesses, while media brands enjoy an 84% NRR, and e-learning platforms have a 27% average NRR.

Net revenue retention best practices

There are two complementary ways to approach NRR–by increasing your revenue and reducing your churn.

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Maximize your revenue

Satisfied customers are more likely to spend 140% more when they’ve had a good experience. When designing or revamping your expansion strategy, aim to deliver value rather than pushing subscription upgrades.

  • Encourage upgrades and cross-sales: 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.

  • 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: Demonstrate value to your consumers by accommodating their needs. Letting them pause their subscription rather than cancel is an excellent way to improve retention in the long run.

Minimize your churn

Churn is inevitable for any subscription business, and when not managed correctly, it results in revenue loss. Combating voluntary and involuntary churn will directly reflect on your revenue retention rate.

  • 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.

  • 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.

Net revenue retention is one of the most effective ways to measure the impact of churn on your revenue. Recurly’s cutting-edge technology and data analytics improve billing continuity, payment decline recovery, and an average of 13% monthly revenue lift.

Start optimizing your revenue retention efforts with Recurly.

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