Why Should Companies Focus On NRR?

Why should a SaaS company focus on Net Revenue Retention Rate?

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It is a fair question. Why should you focus on another metric, like Net Retention Rate (NRR,) when you have so many KPIs? Well, the answer is simple. Your SaaS (Software as a service) business is different from other businesses. It runs specifically on recurring revenue as you do not sell a one-time purchased product. The customer needs to pay you on a subscription basis to keep availing of your products and services. Moreover, the cost of acquiring a new customer is generally 5X greater than retaining existing customers, but these costs can be even higher for Saas companies. Focusing more on retention is a smart move.

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There are three types of existing customers:

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1. Upgrade: Existing customers upgrade the product or services and start paying you more than before.

2. Downgrade: Customers who downgrade their subscription plan and pay you less than before.

3. Constant: Customers pay you the exact amount they were paying before.

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You can see that upgrading customers is profitable for your business, while downgrading is a threat. So, you not only have to retain the customers, but you also have to retain the revenue from them. That is where NRR comes into the picture. Net Retention Rate tells you how much income from existing customers has changed over a specific period. NRR helps you to identify if your customers are profitable or not.

Industry standards suggest that an NRR greater than 90% means your business is healthy. However, NRR less than 90% means your business needs immediate attention and improvements in its products or services. 

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It is now clear why many companies are focusing on NRR and why it is beneficial for you to focus on it too.

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Additional benefits of focusing on NRR as a SaaS Company

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A. Better The NRR, Higher The Revenue In Long-Term

High NRR indicates that you earn adequate revenue from your existing customers. Upselling to these customers will lead to increased revenue. Higher NRR also means a loyal customer base, which helps a company grow in the long run.

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B. Indicates The Stability Of The Company

NRR helps you to estimate the stability of the company. Lower NRR indicates that your business cannot expand with the existing customers. Whereas higher NRR means your company can grow with the current base. Even if your company does not want to invest a lot in acquiring new customers, it can still succeed by retaining the revenue from the existing consumers. Higher NRR leads to more consistent growth for the company.

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C. Net Revenue Retention Rate Helps To Reduce Churn

The first step to solving a problem is to be aware of it. Similarly, the first step to reducing churn is to calculate the NRR. When you are unaware of the Net Retention Rate, you are unaware of the churn. For businesses with complex or custom pricing, using Customer Retention Rate as a metric to estimate the revenue you generate from the existing customers will be more difficult.

More churn = less revenue. NRR can help you understand churn, which helps you make business decisions to reduce those who churn. NRR has become an important KPI over the last decade as SaaS companies have started forecasting their progress based on NRR. Predicting retention within current and new customers and creating the best practices comes down to understanding the complex data from every customer. The best companies, which are growing, are the ones with customers who find value from businesses, are loyal, and share this enthusiasm with their peers. If you are interested in improving your NRR and growing your SaaS business through customer retention, check out Adaptive Pulse!

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To get in-depth knowledge about NRR, visit our blog "What is NRR?" followed by "How To Improve NRR?". You can also learn "How to calculate Net Retention Rate" or use our "Free NRR Calculator" to assess your company's current Net Revenue Retention Rate.

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To learn more about Adaptive Pulse, visit our How it Works page or Book A Demo today!