NRR is an acronym for Net Revenue Retention or Net Retention Rate. It is a metric used by subscription-based businesses, especially Software as a Service (SaaS) companies, to measure the overall revenue growth generated from existing customers over a specific period. NRR takes into account changes in revenue from existing customers due to expansions (upsells, cross-sells, and additional purchases) and contractions (downgrades or reductions in usage) as well as the impact of customer churn (cancellations).
NRR provides a comprehensive view of how a company’s existing customer base is contributing to its overall revenue growth, considering both the expansion of revenue from current customers and the loss of revenue due to churn.
The formula to calculate NRR is as follows:
NRR = ((Ending Revenue from Current Customers + Expansion Revenue) – Contraction Revenue – Churned Revenue) / Starting Revenue from Current Customers
In simpler terms, it’s the ratio of the total revenue generated from existing customers at the end of a period (including expansions) to the total revenue generated from the same set of customers at the beginning of the period, accounting for contractions and churn.
A NRR rate greater than 100% indicates that the company’s existing customer base has contributed more revenue at the end of the period compared to the beginning, even after accounting for lost revenue due to churn. This suggests that the company is effectively upselling or cross-selling to its customers, resulting in overall revenue growth from the existing customer base.
A NRR rate below 100% suggests that the company is experiencing significant churn or contraction within its existing customer base, which could indicate challenges with customer satisfaction, product adoption, or value delivery.
NRR is a critical metric because it provides insights into the net growth and revenue contribution of a company’s existing customer base. High NRR rates indicate strong customer relationships, effective upselling strategies, and positive customer experiences. Lower NRR rates can highlight areas for improvement in customer retention and revenue expansion efforts. Comparing NRR across different periods helps businesses assess the impact of their customer success and growth strategies.