Checking In With Your Base: The Importance of Net Revenue Retention
Retention is a golden metric in many areas of a company: In HR, employee retention indicates the quality of leadership and the health of a company’s culture. And in finance, customer retention signals the health and viability of your business. In SaaS businesses, the most informative view of customer retention is through the window of net revenue retention.
What Is Net Revenue Retention?
Net revenue retention is one of the most important metrics you can measure, because it indicates 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. Your net revenue retention rate shows how successfully your company is not only 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.
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.
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?
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. 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).
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 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 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 net and gross revenue retention rates 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). And retention rates are just one of many SaaS metrics Mosaic can present on a dime. By plugging into 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.