You’re reaching revenue milestones fast but aren’t sure whether this growth is sustainable.
Maybe you’re losing customers or revenue but don’t understand why.
Or you just simply feel like growth is getting more expensive (rising sales and marketing costs are eating out your revenue).
If you’ve found yourself in any of these “shoes,” it’s time to look at your NRR.
Net revenue retention tracks your company’s ability to retain customers and incentivize them to spend more money with time. This means that if you have a high NRR, your business is good at keeping existing customers and generating revenue from them, growing sustainably, and scaling without putting too much emphasis on new customers. Things investors like to see when they consider writing a check for a company.
Note that if you want to see a high NRR, you need to make sure that your product quality, pricing strategy, market fit, upsells, customer service, and more are at a high level.
In this article, we’re going to discuss what net revenue retention is, how to calculate NRR, and why startups should actually track it.
What is NRR, and what is not?
NRR stands for net revenue retention (also called net dollar retention) and means the ability of your brand to retain and grow revenue from existing customers over a certain period of time (typically a month or a year).
In other words, we can define net revenue retention as a percentage change in revenue due to additional purchases, downgrades, and churn.
If you want to calculate NRR, you should include:
Upsells (when customers upgrade to higher-tier plans);
Cross-sells (when customers buy additional products or services);
Add-ons (when customers pay for extra features);
Increases in prices (speaking only about existing customers);
Downgrades (when customers choose a lower-tier plan);
Cancellations (when customers cancel their subscriptions completely);
And exclude:
One-time purchases or fees;
New customer revenue;
Non-recurring revenue;
Refunds & chargebacks.
NRR definition speaks for itself—everything goes around existing customers and revenue they either bring in or take out of your company. As such, net revenue retention helps you see how much money you get from existing customers as they renew, upgrade, or downgrade their subscriptions.
What net revenue retention is not?
Once we’ve dealt with NRR meaning, let’s look at what this metric IS NOT. There are many metrics you can use to track revenue or retention. But the problem is that each of them measures a different angle of this framework.
To keep you from getting lost in this sea of abbreviations (GRR, NRR, ARR, CRR—just one letter different but a whole new formula and story), we’re going to compare some of the commonly confused revenue and retention metrics.
NRR vs GRR
In contrast to net revenue retention, gross revenue retention (also gross retention rate) measures only revenue retention. This metric doesn’t account for expansion revenue, which means that it doesn’t give information on whether the revenue grows and whether a company can make customers spend more on its product / service.
Thus, a higher GRR means your revenue retention is strong, but it doesn’t actually tell you if your revenue is growing.
Also, gross vs net retention differs in percentage: GRR can’t be higher than 100%, while NRR can (and ideally should be).
NRR vs ARR & MRR
Annual recurring revenue (or simply ARR) is the total revenue a business expects to generate from recurring subscriptions in a year. Therefore, ARR (compared to NRR) doesn’t track retention or churn. MRR measures the same as ARR but on a monthly basis—monthly recurring revenue. Thus, it neither tracks retention nor churn. Note that ARR is different from a run rate, which extrapolates a short period of revenue into an annual figure—a useful but often misinterpreted metric.
NRR vs CRR
CRR (customer retention rate) tracks customer retention—how many have stayed loyal to your product / service over a certain period of time. This metric speaks about customers, not revenue.
That’s why you can have high customer churn, but at the same time, your NRR is high (as long as remaining customers keep paying more money).
NRR vs churn rate
The main difference between churn vs retention is in the “sign convention” —NRR is a “positive” metric, as it tells you how much revenue you keep and grow, while churn rate is “negative,” as it tells you how much revenue or customers you lose.
💡 An important note: NRR stands for net revenue retention, NOT net retention rate. Some people may mistakenly decipher the abbreviation of NRR as net retention rate. However, there’s no official metric called this in business.
How to calculate net revenue retention?
To calculate NRR, you need to have:
Starting MRR—how much you’re making from existing customers at the beginning of the period;
Expansion MRR—how much extra revenue you’ve got from upgrades, add-ons, cross-sells, or price increases;
Contraction MRR—the amount of money you’ve lost due to existing customers’ downgrades;
Churned MRR—the amount of money you’ve lost when customers cancel their subscriptions.
Once you’ve got these numbers, follow a simple net revenue retention formula (also called net dollar retention formula):
When you’re calculating the net revenue retention rate, add up starting MRR at the beginning of the month and revenue from upsells and expansions, → then subtract lost revenue from downgrades and churned customers to get the net recurring revenue, → which finally you divide by starting MRR. Multiply the received number by 100 to get the NRR percentage.
A slightly simplified net revenue retention rate formula looks as follows:
Where the numerator “churned MRR” includes both lost revenue from churned customers and contractions (aka downgrades to cheaper plans or removal of paid features).
💡 Let’s have a look at a hypothetical example:
A web3 company had $150,000 in recurring revenue from existing customers at the beginning of March. During this month, a company gained $10,000 as some clients upgraded their plans and bought premium features but lost $4,000 and $2,000 as some other customers cancelled their subscriptions and downgraded their plans.
So, we have:
Starting MRR = $150,000
Expansion MRR = $10,000
Churned MRR = $4,000
Contraction MRR = $2,000
Taking the net revenue retention formula given above, we can calculate the company’s NRR:
NRR = (($150,000 + $10,000 – $4,000 – $2,000) / $150,000) * 100 = 102.67%
What is a good net revenue retention rate?
Although net revenue retention benchmarks may differ across industry and company stages, a rate above 100% is often a good sign.
Let’s get a closer look at possible NRR tiers:
🚀 If NRR >100%, it’s great.
This means that your business is in good health—you’re keeping revenue from existing customers, and, more importantly, it is growing. Thus, you may take a more balanced approach to customer retention-acquisition since you’re not in great need of new clients to keep going.
🟡 If NRR is around 80%—100%, it’s not ideal but still okay.
This means that your company is keeping most of its customers but losing revenue. Businesses within this net revenue retention range should have a close look at their LTV (customer lifetime value) and churn rates. By doing this, they can understand if the low NRR is due to customer drop-off or weak revenue expansion (fewer upsells and cross-sells).
Note that the golden standard of net revenue retention depends on company size—for small and medium businesses, the rate between 90-100% is considered great, while for enterprises, NRR should be above 100%.
❗ If NRR <80%, the situation isn’t so good.
This means you’re losing revenue from existing customers. Such a low net revenue retention rate is a nudge for you to put more effort into retention, revenue expansion, and customer acquisition.
In some cases, you may need to raise additional VC funding, but this, of course, depends not only on your NRR but also on your revenue strategy and cash flow.
It’s worth mentioning that some companies may have a low NRR (<100%) and still be in good health. This is about companies that are at a high-growth stage and are attracting new customers faster than they are losing existing ones.
Also, a company may have a high NRR (>100%) and lose customers. This may be due to increases in prices, effective upselling, or onboarding new customers who can pay more money.
💡 A rule of thumb is not to look at a single metric. Always analyze the net revenue retention rate together with CAC, LTV, churn rate, and other growth metrics to get a full picture of your business health.
Getting back to our hypothetical web3 company, we can say that the company is in good health as its NRR is over 100% (102.67%).
Why is net revenue retention so important for startups?
When you track revenue metrics, you know where your money is coming from and where it’s being lost, especially if we’re speaking about SaaS businesses.
Revenue metrics help SaaS companies understand which products / services are performing well in the market and which aren’t, so you can see if there are problems in marketing, user acquisition, or sales to make the necessary changes on time.
Also, investors like to evaluate your net revenue retention rate. As a North Star metric for most SaaS businesses, NRR shows whether you can retain your customers, expand your revenue, and scale in the long run.
A high NRR makes a company attractive for funding. But a low rate can tell VCs you might have revenue leakage due to churn or poor monetization strategies, which may raise red flags about a company’s profitability and sustainability.
Once again, metrics—be it NRR or other SaaS KPIs—must NOT be analyzed in isolation; only together with other metrics.
Wrap-up: check your revenue engine’s health with NRR
The net revenue retention rate is a good test of your business’s strength and sustainability. The higher the NRR, the better your revenue engine works.
This means your company is good at retaining existing customers and making more money from them over time. And you don’t need to constantly acquire new customers to keep your business going. Not that you don’t need new people at all, but you can save money—customer retention costs less than customer acquisition.
Net revenue retention is among the first metrics investors search for in a pitch deck. It shows them whether your business can scale effectively. If they see a strong NRR, they understand that your revenue model works well and can work sustainably in the long run. But if they see a low rate, they know you might have revenue leakage and high churn.
Remember that NRR alone won’t do justice to your business; you must track and show other important metrics in your financial model. If you need help building a solid financial model or investor-friendly pitch deck, contact our Waveup team. We’ve helped over 1,000 startups get through fundraising successfully and grow their businesses effectively.
FAQs
What is retention?
Retention means when a company knows how and can retain its existing customers over time.
What is NRR in SaaS?
Net revenue retention is an important metric in SaaS because it helps companies see how much revenue they retain and expand from existing customers over a specific period.