Critical SaaS Metrics – Net Revenue Retention (NRR)

In today’s market, there are numerous metrics that SaaS companies track on a regular basis. These can be metrics such as cost to acquire a customer (CAC), life-time value of a customer (LTV), sales force productivity, retention, and many others. However, from our experience, there is one metric we often see buyers and investors really focus in on – that’s net revenue retention (NRR). In this blog, we’ll go over the three different retention metrics, dive deeper into NRR and discuss why it’s important, as well as discuss good targets / benchmarks to strive for as it relates to NRR.

Retention Metrics 101

From our point of view, retention can really be broken down into three distinct sub-metrics:

Logo retention (or customer retention)

Logo retention measures the number of customers a company continues to keep over a specific period. It is calculated as:

(beginning period customers – lost customers during period) / beginning period customers

Logo retention is a great metric as it speaks to underlying customer “stickiness”. However, logo retention treats all customers as equals, which can be misleading as smaller customers are often the ones who churn more frequently – this results in an understatement in retention from a financial perspective. Logo retention cannot be greater than 100%.

Gross revenue retention (GRR)

GRR measures the amount of revenue the company continues to retain from existing customers over a specific period and does not take into account upsells. It is calculated as:

(beginning period MRR or ARR – lost MRR or ARR from churned customers – downsell MRR or ARR from existing customers) / beginning period MRR or ARR

GRR is an excellent metric for seeing how a company is doing at retaining revenue from its existing customers over time. It also eliminates some of the flaws with logo retention, as higher value customers are given much weight than lower value customers. GRR cannot be greater than 100%

NRR

NRR measures the total change in revenue from existing customers over a specific period, taking into account upsells and downsells. It is calculated as:

(beginning period MRR or ARR – lost MRR or ARR from churned customers – downsell MRR or ARR from existing customers + upsell MRR or ARR from existing customers) / beginning period MRR or ARR

NRR from our point of view is one of the most comprehensive retention metrics because it captures the negative impact of churned customers and downsells from existing customers, as well as the positive impact of upsells from existing customers. In short, the question NRR really answers is – what would a company’s revenue be if it didn’t add a single customer during the period? NRR for SaaS businesses vary greatly and they can exceed 100% - We’ll be discussing NRR benchmarks a bit later in this blog.

Illustrative Calculation

The below represents an illustrative calculation of each of the three different retention metrics.

The Importance of NRR and Key Benchmarks for NRR

How are companies like Twilio able to grow their revenue by nearly 75% year-over-year (FY2019) to over $1bn? While Twilio’s clearly shown they have excellent product market fit, they’ve also recognized the revenue opportunity that lies within their existing customer base, rather than just new customers. Of the nearly 75% year-over-year growth that Twilio experienced in FY2019, 40%+ came from existing customers (NRR > 140%).

The key feature of NRR is that it clearly shows and quantifies the value that existing customers are continuing to find in a company’s product. Many of today’s SaaS metrics focus on outbound / inbound sales efforts (sales force productivity, CAC, marketing efficiency, etc.), and it’s easy to forget about the revenue opportunity that lies within a company’s existing customer base. However, we’re seeing more and more SaaS companies shift their focus and increase their emphasis on establishing teams that are dedicated solely to upselling existing customers, as well ensuring existing customers remain happy and don’t churn.

Over the past few years, we’ve spoken to hundreds of strategic and financial buyers and the vast majority place an extremely strong emphasis on metrics such as NRR. Additionally, many of the software focused private equity funds that we’ve spoken to in the past have even gone as far as to set specific benchmarks for NRR that serve as a key decision point on whether they invest or not (usually 100%+). Based on those conversations, we’ve formulated the below benchmarks for NRR. Our hope is that the table below serves as a good indication of where your SaaS business stands as of today, as well as shapes your vision of where you would like to be.

While NRR is an extremely important metric, it doesn’t mean metrics such as GRR and logo retention should be over-looked. A company with a NRR of 130% and a GRR of 60% would still be looked as less favorably, as revenue would be less predictable and would be very contingent on ability to effectively upsell existing customers. Furthermore, a company with an NRR of 130% and a logo retention rate of 50% would still face very different challenges than a company that retains 100% its customers but does not upsell them with any additional products – there is a BIG difference in revenue predictability, and there is lots of value in that.

Conclusion

NRR is arguably one of the most fundamental metrics in determining success within your product and it is something that any SaaS company should be tracking. From our experiences speaking with various buyers and investors, NRR is one of the first metrics buyers and investors are asking to see. Assuming your SaaS business has a good product market fit, competitive pricing, and strong account managers and customer support reps, you should expect good outcomes when it comes NRR.

Written by Boris Petkovic.

About Sampford Advisors

Sampford Advisors is a boutique investment bank exclusively focused on mid-market mergers and acquisitions (M&A) for technology, media and telecom (TMT) companies. We have offices in Toronto, ON, Ottawa, ON, and Austin, TX and have done more Canadian mid-market tech M&A transactions than any other adviser.

Cover Photo by Luke Chesser on Unsplash