How to calculate Net Revenue Retention (NRR)

How to calculate NRR?

Net Revenue Retention is easy to calculate. It considers three major elements and gives you the final rate. Once you determine 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 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 do it monthly, it might not be accurate. Take a significant time period and then calculate the NRR. This way, it will be valuable, 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 element refers to the extra value 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 mainly due to two reasons. First, the customer cancelled their subscription altogether. Second, the customer downgraded the service plan, so they are paying you less than before. Subtract both of these churned revenues from the sum of MRR and expansion revenue.

The Final Formula

You can calculate NRR (Net Revenue Retention) using this formula:

• {(MRR at the beginning of the period + Business expansion revenue – cancelled 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, 10 customers are paying you $100 per month. That 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 plans, and they are paying only $50. At the same time, 1 of them has cancelled the subscription. Now we have:

MRR = $1000

Business expansion revenue = $250

Churned Revenue = $100

Downgraded Revenue = $100

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

     = 105%

This calculation indicates that your business is growing at a rapid 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. These metrics are important because they help you monitor your business, predict business outcomes and make improvements to retain your customers. Adaptive Pulse is helping the data-driven teams to 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]ptivepulse.com or visit our How It Works page!