Using KPI’s for Clarity - Understanding Net Revenue Retention (NRR)

Gaining clarity on the direction of a business seems easy to get to, but so often that is not the case. One number that will help many companies is understanding Net Revenue Retention (NRR).

Here are just a few types of companies that should be checking NRR every month:

• SAAS Companies

• Subscription Companies

• Direct Marketing and Direct Sales Companies

What is NRR?

NRR measures the “net” amount of revenue from one period to another for a business. It is useful because of the way it tracks revenue expansions, contractions, and churn in a consistent manner. This allows for a clear view of existing customer health and can quickly let a company know if its trends on ongoing revenues are going well or heading south! (Note: You want to know this…even if you don’t want to look.)

How to interpret NRR?

• At a Macro Level:

• If your NRR is over 100% you are growing.

• If your NRR is under 100% you are shrinking.

• More specifically a 90% to 100% number is a good number, provided your business is adding new clients each month to make up the shortfall.

• A SAAS business is considered growing and healthy when its annual NRR is over 130% and averaging over 140%, but that does shift during the year with seasonality and where the company is in the business model lifecycle.

How to calculate NRR?

There are 4 factors and you will need them all from two identical time periods (typically month-to-month or year-to-year). The key factors to calculate your number include:

• Baseline Monthly Total Recurring Revenues (MRR)

• Upsell Revenue (UR)

• Downgrade Revenue (DR)

• and Churn Rate.

Here is the formula:

NRR = (Monthly Recurring Revenue MRR + Upsells - Downgrades - Churn) / MRR

Here is an example, you can substitute your numbers into easily to measure your company’s Monthly NRR.

You had $1.75 million in monthly recurring revenue at your health supplement business in June. And with your new product offerings that group added $350k to their orders in July, while others reduced their monthly orders by $150k. You also had a churn rate of 12.57% which reduced the June customer orders by $220k.

You extract the data and get the following:

• Baseline TRR for June - $1,750,000

• TRR Upsells for July - $350,000

• TRR Downgrades for July - $150,000

• TRR Churn for July - $220,000

This plugs into the formula as follows:

• NRR = ($1,750,000 + $350,000 - $150,000 - $220,000) / $1,750,000

This results in an NRR or 98.86%, so the recurring revenue customer volume is falling.

The shortfall must be made up by sales to new customers and past customers.

What can go wrong in looking at NRR?

• Data Inconsistency: Not being rigorous in having like groups to compare and not having a single source of truth.

• Time: These are almost always time based cohorts and need to be consistent. You can measure month-to-month, year-to-year, or same month year-over-year. Just keep them consistent.

• Membership: Consistent rules for which transactions are included in the grouping is critical. Be specific on; member join and exit standards and revenue recognition. Keep it the same to get a useful number.

• Transactional: Group transactions by various data points for your business. For instance, you may have a membership fee (monthly or annual) and this can have its own NRR, while other products can have another NRR so you can have one for membership health and another for recurring product sales trending.

There are a lot of KPIs that you can choose from. If you are struggling with choosing the correct measurements for your business try a few options until you settle on those that help you the most. But be careful not to choose those that only make you or the team feel good. That is tempting, but on the other side of useful.

Grow Happy!