How to calculate Net Revenue Retention (NRR)

Calculate and improve Net Revenue Retention (NRR).

How to calculate Net Revenue Retention (NRR)
Adaptive Pulse

How to calculate NRR?

Net Revenue Retention is easy to calculate. It takes 3 major elements into consideration and gives you the final rate. Once you calculate the NRR of your business you will know how much your SaaS business is profiting from the existing customers. You can make new strategies and develop new products based on the current NRR in order to improve it.

Before learning the formula, you need to understand one thing. It is better to calculate the NRR of your business on a quarterly or annual basis. If you calculate it every month it might not be accurate. Take a significant period of time and then calculate the NRR. This way it will be useful, and you can apply the research to your new business plans.

What does it include?

Initial MRR: The Monthly Recurring Revenue at the start of the period is the first element included while calculating NRR. It is the revenue you had at the beginning of the period. Using this as a base will help you understand the change in the revenue over the selected period. For calculating MRR you have to multiply the number of customers with the average billing amount.

Expansion Revenue Increase: The second element is the increase in revenue due to upselling and cross-selling. This refers to the extra revenue that the customers paid when they upgraded the services or bought a new product that you released. This increase in revenue due to business expansion will be added to the MRR.

Loss in Revenue: Loss in revenue occurs due to two reasons. First, the customer canceled their subscription altogether. Second, the customer downgraded the service plan so now they are paying you less than before. Both of these churned revenues are subtracted from the sum of MRR and expansion revenue.

The Final Formula

You can calculate NRR (Net Revenue Retention) using either of the following formulas:

  • {(MRR at the beginning of the period + Business expansion revenue canceled MRR Downgraded MRR) / MRR at the beginning of the period} * 100

The unit of NRR is a percentage (%).

Let’s take an example for a better understanding. Assume that at the beginning of the period 10 customers are paying you $100 per month. This means your MRR is 10*100= $1000

Now, out of these 10 customers 5 have upgraded their plans and now they pay you $150. However, 2 of them have downgraded their plan and they are paying only $50. At the same time, 1 of them has canceled the subscription. Now we have:

MRR = $1000

Business expansion revenue = $250

Churned Revenue = $125

Downgraded Revenue = $75

NRR = {(1000 + 250 - 125 - 75) / 1000} * 100

        = 105%

This indicated that your business is growing at a swift rate with your existing customers. The formula is right in front of you but it just adds up to the burden to calculate and interpret these metrics every quarter or every year. They are important as well because they help you monitor your business, predict business outcomes and make improvements to retain your customers. Adaptive Pulse is helping data-driven teams improve rates using our purpose-built AI models for customer retention.

Feel free to reach out if we can help you with your qualitative customer intelligence or for a blog topic request to [email protected] or visit our How It Works page!

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