Securing funding has become a far more difficult forest to navigate, even if you're making a positive impact on the user experience.
Getting the bears to come out of their caves requires some seriously honeyed proof.
One figure that’s a solid conversation starter is net retention rate (NRR).
Imagine you're at ProductCon this year, and that person whose LinkedIn profile you have bookmarked approaches you.
They ask you what sets your SaaS business apart from the rest, and you confidently reply, "Our net retention rate is through the roof!" The investor's eyes light up, and they immediately ask for more details.
That's the power of a high net retention rate in the SaaS world.
It shows that your customers are happy and sticking around, which is music to the ears of any investor. A high net retention rate indicates strong customer satisfaction and a steady stream of recurring revenue - two factors that are extremely attractive to investors.
But what is net retention rate, you might ask?
Simply put, it measures how many of your current customers are sticking around and continuing to pay for your product over time. Think of it as the pulse of your business - the higher the rate, the healthier your business is and the more attractive it becomes to potential investors.
Let’s unpack revenue retention rate, why it’s so popular for reporting, and how to work it out.
We’ll also show you how to boost your NRR, focusing on improving your customer retention rate and lowering your revenue churn.
What is net revenue retention (NRR)?
Your product-led growth (PLG) business objectives are built on and fuelled by recurring and additional revenue. The rakings from happy customers and your customer success efforts.
NRR is the amount of money you earn from your customer base and manage to sustain over time periods.
How does net revenue retention differ from normal netention rate?
It’s an easy way to tell whether a SaaS business is healthy or not. A high NRR indicates many strong and satisfied customers happily maintaining their subscriptions, while a low one shows a high customer acquisition cost (CAC) or churn with leaky annual revenue.
A positive NRR depends on functions like:
- A smooth and value-driven customer journey.
- A data-focused customer success team that works on any opportunity.
- A product geared around maximizing customer lifetime value (CLV).
- All of your teams analyzing and working on product usage data.
It’s one of the first metrics investors look at, and your revenue retention calculations could sway their decision in your favor, or not.
NRR expresses your financial stability, long-term growth capacity, and overall customer health.
Why is net retention rate so important?
It’s been a difficult time for all of us in the SaaS and tech industry as we trudge through our first recession.
Despite our best efforts and the implementation of revolutionary PLG motions, the market has finally hit its first real challenge.
SaaS companies have been doing very well for the past decade, but the slump has caused a decline in their values.
Mass layoffs, hesitant investors, and reduced spending; it’s been a scary period.
What the founder happened?
A Forbes study showed that SaaS companies suffered a 53% drop in value from Q3 2021 to Q1 2022, much more than the overall market decline of 15%. The study also found that the size of a company's Enterprise value-to-sales ratio eerily reflects its drop in value.
Amazingly, smaller SaaS companies performed better during the downturn than larger ones. Forbes also looked at the widely followed "Rule of 40" in the SaaS industry, which states that if a company's growth and profitability combine to exceed 40%, the business is healthy.
The notion that growth is more important to investors than profitability is gaining increasing validity, even during a recession.
The way we (and apparently many investors) see it, you need to focus on growth during this downturn and find a balance between expansion and profitability for long-term success.
Grow, but not at all costs
Despite what some of the more traditional financial sources claim, we strongly believe that the “growth at all costs” era needs to end.
We want to do away with harmful practices like:
- Pushing products onto customers that don’t need them.
- Thousands of high-level employees being laid off without warning.
- Wealthy but jaded investors that can’t seem to find worthy causes.
What’s the alternative?
We want you to keep growing, but healthily. Many investors might be struggling to find startups worth their millions, but there are several confidence signals they’re seeking.
If you want to attract angels, turn on green lights like:
- Keeping a foot on your churn rate with stellar customer service and overall customer experience.
- Showing off a strong and expanding customer base from the previous month to the next.
- Strong, stable revenue over a fair period of time, winning customer retention metrics, and a larger customer base.
And that’s where net retention rate (NRR) comes in.
This single metric is a simple, clear summary of your business's performance. It’s the gold standard for measuring sustainable growth and far more reliable than monthly recurring revenue (MRR).
A high NRR proves that you’ve optimized your customer success practices and are earning plenty of revenue from expansion.
How to work out your NRR
NRR is a key indicator of your business health, so let’s figure out how to calculate this critical metric.
Here’s the formula:
Let’s use an example to see how you get your NRR, say, in September 2022.
Here are the metrics you’d need:
- Contraction MRR: The total recurring revenue you lost from your customer base depleting in August.
- Churn MRR: The recurring revenue you lost from customers churning in August.
- Starting MRR: The total recurring revenue earned from existing customers in August.
- Expansion MRR: The new revenue earned from existing customers in September based on cross and upsells.
Subtract your Churn MRR + Expansion MRR and divide that by your Starting MRR, multiplied by 100.
The total recurring revenue you lost from your customer base depleting in the previous month.
The recurring revenue you lost from customers churning in the previous month.
The new revenue earned from existing customers in the previous month based on cross and upsells.
The total recurring revenue earned from existing customers in the previous month.
What are you aiming for with your NRR?
An NRR above 100% is a fair indication of growth.
In the SaaS industry, the average NRR is around 100%.
Let’s consult the 2022 B2B Saas Retention Benchmarks report from SaaS Capital to see how companies fared in 2022.
SaaS Capital questioned over 1,500 B2B SaaS businesses - the most ambitious survey in this department known to SaaS research.
According to the survey:
- Businesses with an ARR of over $1 million enjoyed a median growth rate of 40%.
- Those responders with a minimum NRR of 119% enjoyed a slightly higher median growth rate.
- Finally, the companies that managed to capture an NRR between 120% to above 130% grew from 54% to a staggering 84%.
SaaS Capital’s takeaways found that “Growth rate is positively and exponentially correlated with net revenue retention.”
Finally, if you’d like to perform as well as the big players in SaaS Capital’s report, you’ll need a minimum NRR of 110% to enjoy a 40% median growth rate.
How to improve your NRR
Your company has many moving parts, with your product being the engine.
It’s what your customers are paying for, after all, and what sets you apart from the competition.
You worked too hard crafting a product that provides unique value to let blind spots kill your revenue.
Here’s how you can improve your NRR and snag a 110% result.
Look behind the veil with product data
To keep customers happy, you need to ensure your product is top-notch, and to do that, you need to understand your product data.
Think about it like a chef and their ingredients. If a chef doesn't understand the elements they're using, or their customers’ dietary preferences, they'll have a hard time getting that Michelin star.
The same goes for SaaS companies and their product data. Without a good understanding of how your product is being used, you won't be able to make the necessary improvements to keep customers satisfied.
And keeping customers satisfied is key to your company's NRR.
So, how does this sales data help with boosting this key metric? You can identify areas that need improvement by tracking how your customers use your product.
You’ll know which features are popular, overlooked, or frustrating for your users. With this information, you can make informed changes to improve your product and keep your customers returning.
You’ll also avoid churn and enjoy a new level of expansion.
Churn is a major challenge for any SaaS company and its inbound sales efforts, as losing customers can significantly impact the bottom line.
To combat this, you must keep a close eye on your existing customers and be proactive in addressing any issues that might arise.
One effective way to keep customers from churning is by creating a “Churn risk” list with Breyta.
We’ll let you explore entire product-qualified accounts (PQAs) and understand which events led to their critical state and how to remedy them.
Increasing expansion revenue
In addition to reducing churn, you can also focus on increasing expansion revenue.
This involves finding opportunities for your best-fit customers to use additional products or upgrade to a higher-tier plan.
The key to success here is delivering insights to your sales team, who can then take action and pitch these appealing options to customers.
Breyta’s investigative power lets you zoom in on your customers and identify who’s ready for renewal.
You want to keep tabs on all your power users and virtually any account or user that’s displaying expansion-friendly signals.
By doing so, you’ll retain your existing customers, and grow your revenue over time.
Nothing but net
Net Retention Rate (NRR) is the heartbeat of any SaaS business, measuring the success of your customer retention and recurring revenue.
It’s a simple yet powerful metric that shows investors how healthy your business is and how attractive it will be to them. As securing funding is becoming more challenging, having a high NRR can make all the difference.
The formula is straightforward, but its impact on your business is immense.
It provides a snapshot of your customer satisfaction, customer churn, and customer expansion, which are all critical indicators of a thriving SaaS company.
As the SaaS industry navigates through tough times during the current recession, it’s more important than ever to focus on growth while maintaining profitability.
Investors are searching for startups that show strong and expanding customer bases, stable revenue over time, and a healthy NRR. The "growth at all costs" mentality is no longer acceptable and should be replaced with a focus on sustainable growth.
Investors often use NRR as a benchmark for evaluating SaaS businesses, as it provides a clearer picture of performance compared to monthly recurring revenue (MRR).
A high NRR shows that your customers are happy and sticking around, resulting in a steady stream of recurring revenue and a healthier business overall.
By calculating and understanding your NRR, you can make informed decisions that drive growth, customer satisfaction, and profitability. It’s the metric that sets your SaaS apart from the rest and can make all the difference when attracting investors.
A data-driven approach is key to solving almost any issue in SaaS, and Breyta brings you that much closer to the metrics that really matter.