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Revenue ARR MRR

Net And Gross Dollar Retention

The percent of gross and net revenue retained from a prior period.

What Is Net Revenue Retention?

Net revenue retention (NRR), sometimes referred to as net dollar retention (NDR), is a metric that compares the revenue earned when a customer signed to the revenue earned from a customer in the current period. It accounts for lost revenue from customer churn or downgrades as well as any increases in total revenue (annual recurring revenue or monthly recurring revenue) over a set period of time.

NRR is an essential metric for SaaS companies and other businesses to measure, because it shows whether or not your product has value for your current customers and whether or not they’re happy with your pricing, response time, and reliability. NRR helps you evaluate customer success and shows how successfully your company is not only at renewing business, but generating additional revenue from its existing customers.

When running a business, it’s easy to get distracted by the shiny prospect of attracting and adding new customers—and while that is an important thing to do when growing a company, it’s just as important to think about customer acquisition cost (CAC) because on average, it’s 12.5 times more costly to acquire a new customer than it is to retain or upsell an existing customer, so it is critical you pay close attention to your net retention rate.

Why Does Your Net Revenue Retention Rate Matter?

Net revenue retention rate is a comprehensive metric that accounts for churn or downgrades (i.e. loss of customer value) and for expansion or upgrades (i.e. upsells or cross-sells to current customers). The net revenue calculation is key to knowing the rate at which you are retaining revenue helps you understand the growth trajectory for your business. For example, if you stopped adding new customers tomorrow, how much revenue could you expect to bring in next month? How about next quarter?

How Do You Calculate Net Revenue Retention?

Net revenue retention measures the recurring revenue from your customers over a set period of time. Net revenue retention rate looks at the amount of change from one period of time to another. Curious about how to find net revenue? For the retention calculation you divide the current monthly or annually recurring revenue (MRR or ARR) for a given cohort of customers by the recurring revenue for that same cohort in a previous time period of the same length—say, last month, last quarter, or last year. Below is the net revenue formula that can be used.

net revenue retention formula starting mrr plus change in MRR divided by starting mrr

Net revenue retention formula

There are two basic inputs for a net revenue retention calculation:

  • Starting MRR/ARR: The MRR or ARR from the previous period (last month, last quarter, last year, etc.)
  • Change in MRR/ARR: Total MRR or ARR change from upsells, downgrades, and churn for the set of customers in your “Starting MRR/ARR” metric compared to the current period.

At first glance, this seems like a simple metric to calculate. However, there are so many different ways to interpret “Starting MRR/ARR” and “Change in MRR/ARR,” all of which depend on the specific context of your business.

Net Revenue Retention Vs. Gross Revenue Retention

Since we’re on the subject of revenue retention, let’s take a quick look at gross revenue retention (GRR). The gross revenue calculation is important to know since it excludes the impact of price increases and expansion within your customer base. Because it doesn’t factor in upsells, gross retention is a more conservative metric, and a better indicator of how well your company is retaining revenue from its existing customers over their lifetime.

How Do You Calculate Gross Revenue Retention?

Gross revenue retention is always equal to or lower than net revenue retention, and it can’t be greater than 100%. The basic calculation is the same as net revenue retention, but the MRR for each individual customer in the current month can’t exceed the MRR for that customer from one year ago (remember, gross retention can factor in downgrades, but not upgrades from your existing customer base).

gross revenue retention formula visualization

Gross revenue retention formula

Much like the calculation for NRR, gross revenue retention is based on two main inputs:

  • Starting MRR/ARR: The MRR or ARR from the previous period (last month, last quarter, last year, etc.)
  • Downgrade/churn MRR/ARR: Total MRR or ARR downgrade and churn amounts from the set of customers in your “Starting MRR/ARR” up through the current period.

The complexity of this calculation comes down to the way you define these inputs. If you have a strong definition of ARR/MRR, upgrades, downgrades, and churn in your organization, calculating NRR and gross revenue retention should be simple.

The Challenges of Tracking Revenue Retention Rates

Tracking retention rates alone isn’t especially challenging. If you know the current value of each customer’s account and the value of these accounts last month or last year, you can pull this metric easily enough. The tricky part is fleshing out the full story behind this key metric. Like all SaaS metrics, your revenue retention rate is just one character in a large cast, and it’s essential to know its backstory and understand its relationships to the other cast members.

For example, let’s say your net revenue retention rate is high, but your gross rate is low. What will happen to your net retention if half your customers downgrade their subscriptions within the next year? Or, for another example, would you rather lose 10 customers with subscriptions of $10,000 each, for a total of $100,000 in lost revenue, or one customer with a subscription of $150,000? Depending on your CAC and average customer lifetime value (LTV), the answer may be different.

It’s important to understand why your customer retention rates are what they are by looking not just at the key players (MRR and ARR), but at adjacent metrics that shed much needed light. Many data sources feed these metrics, and having all of them at your disposal, on demand and error free, is when the real challenge enters the scene.

How to Make Your Revenue Retention Rates Make More Sense

With Mosaic, you can see your customer retention metrics any time you want, and easily plug different customer cohorts and time periods into the equation for different perspectives (and therefore, a more holistic understanding of your revenue story). But Mosaic does more than just make it easier to run your retention analysis.

By integrating with your CRM, HRIS, ERP, and payment system, Mosaic pulls and normalizes relevant data and automatically calculates all the metrics mentioned above, as well as your magic number, your runway, and many others. It’s easy to map your calculations to your business’ KPIs and just as easy to present deep financial insights via crystal clear representations.

The Bottom Line

Understanding your net revenue retention rate helps you understand how your customers are feeling about you. Understanding your net revenue retention rate in context helps you understand how your business is feeling financially and how it will fare in the future.

Category
Revenue ARR MRR
Description

This key metric provides insight into the health of your customer base and growth trajectory of your business.

Gross Retention (success in retaining your existing customers) and Net Retention (total revenue minus any revenue churn plus any revenue expansion from upgrades and upsells).

A must have metric for investor reporting easily accessible from within the catalog.

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