What is Net revenue retention (NRR) and why is it important?

Net Revenue Retention (NRR) is a critical metric for startup investing because it provides insights into a startup's ability to retain and grow revenue from existing customers. High NRR indicates strong customer satisfaction, product-market fit, and the potential for sustainable growth. It also suggests that the startup can generate more revenue from its existing customer base through upsells and cross-sells, reducing reliance on new customer acquisition for growth. For investors, a strong NRR signals a healthier, more resilient business with a potentially higher lifetime value per customer, enhancing investment attractiveness.

How is Net Revenue Retention measured?

To measure Net Revenue Retention (NRR), calculate the revenue from existing customers at the beginning of a period, adjust for upgrades, downgrades, and churn during that period, and compare it to the revenue from the same set of customers at the end. Essentially, it's the percentage of recurring revenue retained from existing customers, including additional revenue from upsells or expansions, minus lost revenue from churn or downgrades, divided by the total revenue at the start of the period, multiplied by 100.

NRR = [(Starting Revenue + Expansion Revenue - Churned Revenue) / Starting Revenue] x 100

Starting Revenue: Revenue at the beginning of the measurement timeframe (usually the start of the year or a monthly period) from existing customers.

Expansion Revenue: Additional revenue acquired from existing customers during the measurement timeframe. This includes upsells, cross-sells, and any upgrades by existing users.

Churned Revenue: Revenue lost due to customers downgrading or leaving during the measurement timeframe.

What does success look like?

NRR scores above 100% indicate that revenue from existing customers has grown, reflecting successful upsells or cross-sells exceeding any losses from churn. Scores below 100% show that losses (churn, downgrades) outweigh gains, pointing to potential issues with customer satisfaction, product-market fit, or competitive positioning. High NRR is crucial as it signifies efficient growth and customer loyalty, while low NRR may signal underlying problems that could hamper long-term sustainability and attractiveness to investors.

How does NRR differ for consumer vs. enterprise SaaS companies?

NRR can have different implications for enterprise versus consumer businesses due to their distinct business models and customer engagement strategies. In enterprise businesses, where contracts are larger and longer-term, a high NRR is crucial for stability and growth, as acquiring new large customers can be time-consuming and expensive. In contrast, consumer businesses, often characterized by higher volume but lower value transactions, might focus more on customer acquisition. However, a strong NRR is valuable in both contexts, indicating healthy growth and customer satisfaction.