Measuring Net Revenue Retention in SaaS
Net Revenue Retention (NRR) is one of the most important metrics in a SaaS business. It measures the value of a cohort of customers over time including expansion, cross-sell, and churn or contraction (loss of revenue). Needless to say if you want recurring revenue, you need to deliver recurring customer impact ;). But it’s not the topic of this conversation.
So how do you measure NRR?
The typical formula out there is starting MRR/ending MRR*100%. In B2B SaaS we typically take the annual timeframe because of the annual contracts.
This is what I call ‘investors’ approach - as you essentially take the entire paying customer base to calculate NRR. There’s one more ‘operational’ approach - you only take the last 1y cohort to calculate NRR. By comparing the two you will see whether your NRR has improved against the metric of the entire customer base or not.
But there’re also other ways to calculate that. Here’s a breakdown of how popular public companies calculate NRR:
Twilio: Our dollar-based net expansion rate compares the revenue from active customer accounts in a quarter to the same quarter in the prior year.
Box measure 12 month bookings changes for each cohort: We calculate our retention rate as of a period end by starting with the annual contract value (ACV) from customers with contract value of $5,000 or more as of 12 months prior to such period end (Prior Period ACV) and a subscription term of at least 12 months. We then calculate ACV from these same customers as of the current period end (Current Period ACV). Finally, we divide the aggregate Current Period ACV for the trailing 12 month period by the aggregate Prior Period ACV for the trailing 12 month period to arrive at our retention rate.
MongoDB has its unique way to calculate NRR as well: We calculate net ARR expansion rate by dividing the ARR for a given period from customers who were also customers at the close of the same period in the prior year, the base period, by the ARR for the base period from those same customers.
How do you pick the right one for the business? Few ideas:
if your business has annual contracts, then measure it using annual timeframes;
if your business has historical spikes in expansions/churn (meaning you probably work with enterprise customer segment), then comparing starting and ending revenue smoothed out by quarters is a better measure;
finally if you business is usage/utility based then monthly is likely a way to go.
It’s also important for founders and product leadership to benchmark your business to other companies who (1) measure it the same way, (2) who’re in your category.
Imagine you’re in project/collaborative management space and you’re lucky there’re public companies you can compare yourself with. This is a comparison table I’ve created at Wrike to compare ourselves with some of the public companies in the niche.
However more important principle is to stick to the way you calculate NRR to stay consistent ;).