If you could choose only one metric to accurately determine the current health of a business and predict its future success, you’d likely pick net revenue retention.
Why?
Net revenue retention is maintaining and increasing income from existing customers over time. So it’s a critical metric that impacts the sustainability and scalability of any business (but especially SaaS companies).
Additionally, revenue retention goes beyond focusing on customer retention by considering the customer’s lifetime value and the profits they generate over time.
In the current competitive landscape, winning customers is not good enough—you must keep them.
Revenue Churn vs. Revenue Expansion vs. Revenue Retention
Revenue Churn
Revenue churn is a key metric that indicates the loss of revenue a business experiences over a certain period due to customers discontinuing their subscriptions, canceling their contracts or downgrading to a lower-tier product or service.
Revenue churn specifically measures monetary value lost, not the number of customers. Even if you lose a few customers, your revenue churn could be significant if those customers had high-value contracts or subscribed to your premium offerings.
Revenue churn represents the outgoing tide of revenue, whereas revenue retention represents the incoming tide, focusing on the revenue a business retains from its existing customers over time.
These two metrics are closely linked and inversely proportional. If a company has a high revenue churn rate, it’s likely to have a lower revenue retention rate. Together, they can provide a comprehensive look into a company’s financial health.
Revenue Expansion
Revenue expansion refers to the growth in revenue derived from existing customers over a specific period. This growth can occur through upselling, cross-selling and implementing price increases.
It measures the additional revenue gained from the initial revenue when a customer starts doing business with you.
Revenue retention also focuses on maintaining and potentially growing existing revenue from a customer over time. However, revenue retention is also deeply concerned with preventing the loss of revenue, which isn’t a focus of revenue expansion.
While revenue expansion is a positive subset of revenue retention, it does not encapsulate the whole picture. A business might successfully increase revenue from existing customers (revenue expansion) but still have a low revenue retention rate if it simultaneously loses a significant amount of revenue from departing or downgrading customers.
Revenue Retention
This measurement helps companies understand their success in maintaining revenue streams and preventing churn. A high revenue retention rate suggests that a business is good at keeping its customers satisfied and maintaining steady revenue, even without adding new customers.
How to Calculate Revenue Retention
Revenue retention, also known as gross revenue retention, focuses on the recurring revenue that a company retains from existing customers over a certain period without considering the additional revenue generated through upsells or cross-sells. It’s calculated as:
Revenue Retention % = [(Starting Monthly Recurring Revenue (MRR) – Churned MRR) / Starting MRR] x 100
This metric allows companies to understand how much revenue they lose due to customer attrition, contract downgrades or any other form of revenue contraction.
Revenue Retention Example
Let’s say a SaaS company starts the month with an MRR of $10,000. By the end of the month, they’ve lost some customers, resulting in a loss (churn) of $1,000 in MRR.
Their Revenue Retention would then be calculated as:
Revenue Retention % = [($10,000 – $1,000) / $10,000] x 100 = 90%
This means they’ve retained 90% of the revenue they began the month with, excluding any additional revenue from upsells or cross-sells.
What is Net Revenue Retention?
Net Revenue Retention (NRR) measures the percentage change in recurring revenue from existing customers over a specific period. It not only considers the revenue retained from existing customers but also considers upsells (additional revenue from existing customers) and churn (revenue lost from cancellations or downgrades).
This is how it works: if your business starts the month with $100 in monthly recurring revenue (MRR), loses $10 due to churn but gains an extra $20 from upsells, the net retention rate would be 110%. This means despite losing some customers, the additional sales to existing customers allowed the business to grow its revenue.
Net Revenue Retention is an important measure of business health. A rate greater than 100% is generally excellent, indicating that your expansion revenue (upsells and cross-sells) is more than offset by any lost revenue from churn. It shows that your business is growing its revenue from existing customers, even if it’s not adding new customers.
This metric is highly valued because retaining and expanding existing customers is often more cost-effective than acquiring new customers due to lower marketing and sales costs.
Companies with high revenue retention often have high investment appeal because they are generally viewed as more secure because they have proven their ability to maintain their customer base and grow profits over time.
This is why revenue retention is an excellent metric for measuring a business’s current success and predicting its future growth.
Net Revenue Retention Formula
Net Revenue Retention % = [(Starting MRR + Expansion MRR – Churned MRR) / Starting MRR] x 100
Net Revenue Retention Example
Let’s say a SaaS company starts the month with the same MRR of $10,000. They also lose $1,000 due to churn. However, throughout the month, they successfully upsell and cross-sell to their existing customers, generating an additional $1,500 in MRR.
Their Net Revenue Retention would be calculated as:
Net Revenue Retention % = [($10,000 + $1,500 – $1,000) / $10,000] x 100 = 105%
This means that despite losing some customers, they’ve not only managed to retain their original revenue but have also grown it by 5% thanks to the additional revenue from upselling and cross-selling to existing customers.
Case Study: Slack’s Success in Net Revenue Retention
Slack’s impressive net revenue retention success has been attributed to its customer-centric approach and robust functionality that drives user engagement and expansion. Slack achieved a net dollar retention rate of over 143%, as reported in its 2019 Form S-1 filed before its direct listing. This means that, on average, existing customers were not only sticking around but also increasing their spending by 43%.
Strategies Employed
- Product-Centric Approach: Slack’s product enhances communication and collaboration within teams. This inherent value proposition encourages users to actively engage with the product, improving retention.
- Focus on User Experience: Slack provides an intuitive, user-friendly interface and a seamless user experience, which encourages customers to continue using their services and explore more features, leading to increased usage and a higher likelihood of upselling.
- Freemium Model and Easy Upselling: Slack’s freemium model allows users to try the product at no cost. Once users see the value, they often upgrade to paid versions for added features and capabilities, increasing Slack’s MRR from existing users.
- Integration with Other Tools: Slack integrates with many other tools and platforms, increasing its value to users and making it more difficult to replace, thereby improving customer retention.
- Customer Success Team: Slack has a dedicated team to ensure that larger customers are onboarded and using the software effectively.
Result
These strategies combined resulted in Slack’s remarkable Net Revenue Retention. By focusing on its existing customers (both on free and paid subscription plans) ensuring they could derive maximum value from the product, and strategically upselling, Slack substantially increased its revenue from existing customers.
Learn More About Revenue Retention in Pragmatic’s Market Course
In our Market Course, you’ll learn more about revenue retention to drive growth. You’ll also gain a deep understanding of your buyers and their purchasing behaviors and develop strategic marketing plans that drive success.
With topics ranging from buyer personas to the buyer’s journey, this course equips you with the knowledge and skills to connect your business to your target market.
