What is Net Revenue Retention in SaaS and How to Calculate it Correctly (2024)

FAQs

What is good net revenue retention SaaS? ›

Across all SaaS companies, the median Net Retention Rate is ~100%. Higher Annual Contract Value (ACV) products have a higher Net Retention Rates. For SaaS companies selling into small and medium businesses (SMBs), a good Net Retention Rate is 90%. For Enterprise SaaS, 125% is considered a good Net Retention Rate.

Net Dollar Retention rate is the percentage of the starting Monthly Recurring Revenue (MRR) you are left with at the end of a specific period. To calculate the SaaS NDR, add your upgrade MRR to the starting MRR. Then subtract your downgrades MRR and churn MRR from the result.

Net Revenue Retention calculates total revenue (including expansion) minus revenue churn (contract expirations, cancelations, or downgrades). Net Revenue Retention = Monthly Recurring Revenue (MRR) at Start of Month + Expansions + Upsells – Churn – Contractions. MRR at Start of Month.

You can evaluate NRR on a monthly or annual basis, depending on your needs. Once you've determined the period of time you want to measure, add the value of your renewed contracts with your expansion revenue and divide it by the total value of all contracts that were up for renewal.

NRR over 100% indicates that the revenue gained from upsells, cross-sells, and add-ons are larger than the revenue lost due to downgrades and churn. But business size is a factor when you're looking for a “good NRR”. The benchmark for a good NRR differs for small, medium, and enterprise businesses.

The Rule of 40 is a principle that states a software company's combined revenue growth rate and profit margin should equal or exceed 40%. SaaS companies above 40% are generating profit at a rate that's sustainable, whereas companies below 40% may face cash flow or liquidity issues.

To calculate net revenue retention, subtract lost revenue (revenue churn and account contraction) from total revenue (starting recurring revenue plus account expansion) and divide by your starting amount. Say you're calculating your NRR for April 2022.

As for the retention ratio, the equation is retained earnings divided by net income, as discussed earlier. The 90% retention ratio signifies that net of any dividends paid out to equity shareholders, 90% of the company's net earnings are kept and accumulated on its balance sheet to be spent on a later date.

To calculate the retention rate, divide the number of employees that stayed with your company through the entire time period by the number of employees you started with on day one. Then, multiply that number by 100 to get your employee retention rate.

How to calculate the Gross Revenue Retention rate? To measure the GRR rate, subtract the churn and downgrade MRR from the starting MRR and divide the value by the starting amount, then multiply the ratio by 100.

Who is responsible for net revenue retention? ›

Customer success plays a crucial role in your company's Net Revenue Retention numbers. After all, retention and renewals are two of the customer success department's primary responsibilities. Every customer that CS saves, every extra seat they sell, and every additional service they provide increases your NRR.

For example, an 80% loyalty/retention rate means that 20% of customers are lost (churned). And a 60% loyalty/retention rate means that 40% of customers are lost/churned. In all cases, the retention and the churn rate should add up to 100% to account for all the customers.

Calculating Retention Rate in Excel

To get retention rate for each individual month, we just divide the “stayers” column by the “starters” column. Note that the numbers for “Employees at Start of Month” change because new people are hired.

Net revenue, or net income, is equal to a company's gross revenue minus all of its expenses, including fixed expenses. It's important to know the difference between the two, because gross revenue only provides part of your company's overall picture.

To calculate retention rate, divide your active users that continue their subscriptions at the end of a given period by the total number of active users you had at the beginning of that time period.

What is a good employee retention rate? Generally, employee retention rates of 90% or higher are considered good, meaning a company should aim for an average employee turnover rate of 10% or less. In 2021, the average retention rate was around 52.8%², but the individual rate varies by industry and sector.

Retention is usually measured as the ratio of customers or revenue you have kept in a given period and lies between 0% and 100%. Having a retention rate of 100% is ideal but usually very hard if not impossible to achieve.

Anywhere between 35-60% rate of retention on Day 1 indicates a high retention rate. It's important to note that there's only a slight difference between retention averages for Android and iOS users.

Based on our experience, a good benchmark gross margin for a SaaS company is over 75%. Typically, most privately held SaaS businesses we work with have gross margins in the range of 70% to 85%. Anything below 70% begins to raise a red flag for us and prompts us to do a deeper dive into several other metrics.

The LTV to CAC ratio, as a benchmark, should be at least 3:1. If it isn't above 3, you're spending way too much on customer acquisition, or you're unable to retain your customers over time.

What is a healthy EBITDA for SaaS? ›

This number is a well-known figure in the SaaS Industry that assesses the health of your SaaS Business. The formula says that if you add together your revenue growth rate and EBITDA profit margin, and if their sum equals more than 40%, your company is healthy and doing well.

In SaaS, retention is a key metric that measures the percentage of customers you retain over a period and shows both current and future revenue. Ideally, a high retention rate indicates a low churn rate.

NRR = (A + B – C – D) / A

This shows that the company is still growing after the losses incurred through churn and downgrades.

A retention bonus, also called retention pay or a retention package, is a lump sum of money a company pays to an employee to stay with the company for a specific amount of time. Usually, retention bonuses are sizable amounts of money, ranging from 10% to 25% of an employee's base pay.

Gross retention tells you how much revenue you're maintaining when activity that increases your average customer value isn't factored in. Net retention tells you how much revenue you're maintaining when revenue-increasing growth activity is part of the equation.

As you can see, the net retention rate is important because it's a leading indicator of the revenue and profit growth potential of the business. When a business gains revenue through a subscription-based model or repeat purchases, it is highly susceptible to churn.

ARR stands for annual recurring revenue. NRR stands for net recurring revenue.

What is the purpose of retention? Retention is a percentage (usually up to 5% of the contract sum) of each payment made under a construction contract which is withheld in order to try and ensure that works under the construction contract are completed to the required standard.

Retention is an amount of money withheld from a contractor until a job is complete. This normally is 5-10% of the contract's sum. It acts as a kind of security deposit: if defects are left by the contractor that they fail to remedy, the money is rightfully retained by the employer to fix those defects.

What is a good metric for retention? ›

There are 10 retention KPIs you should look out for. These include customer retention rate, monthly recurring revenue, customer lifetime value, DAU to MAU rate, repeat purchase rate, expansion MRR, customer satisfaction score, net promoter score, customer health score, and the revenue churn rate.

Retention may be measured by the methods of relearning, recall, and recognition.

Net revenue (or net sales) subtracts any discounts or allowances from gross revenue. For the same shoemaker, the net revenue for the $100 pair of shoes they sold, which allowed retailers to sell at a 40% discount in order to clear inventories, would be $60.

Profit on the Income Statement

Net profit represents the income remaining after all operating, and other expenses are subtracted from net revenue. Net revenue only considers expenses directly tied to revenue.

The Net Profit Margin KPI measures how effective your business is at generating profit on each dollar of revenue you bring in. This financial KPI is a measure of the profitability of your business and is instrumental in making long- and short-term financial decisions.

The difference between turnover and retention

Employee turnover is the proportion of your workforce who leave during a period of time (usually per year). Retention is the proportion of employees who stay.

According to reports, a good FCR rate lies anywhere between 41-94%. Tips for improvement: Get to the root cause of the low FCR rate, which in turn, will help you to identify common issues, inefficiencies, and knowledge gaps.

Industry Benchmarks

The average 30-day rate broken down by industry ranges from 27% to 43%, but for higher performing apps, that range is 32% to 66%. See more details here. While the average hovers around 20% 90-day retention, it's best to aim for 25% or higher depending on your industry.

Since net dollar retention looks at the percentage of your business that you've been able to keep and expand in a specific time period, a good benchmark would be a rate of at least 100%. An NDR of 100% or above means your current total ARR is greater than or equal to your beginning ARR.

Retention rate is often calculated on an annual basis, dividing the number of employees with one year or more of service by the number of staff in those positions one year ago. Positions added during the year would not be counted.

Is retention rate a KPI? ›

Customer Retention Rate is one of the most important KPIs (if not the most important KPI next to the New Sales KPIs) to subscription based businesses, because it impacts (1) recurring revenue, (2) customer satisfaction levels (which impacts account expansions and referrals) and (3) the growth of the business.

When it is above 100%, it means the business is healthy and is able to grow even without acquiring new customers. It also shows that the revenue generated from upgrades and cross-sells are more than the revenue lost due to churn or downgrades.

App retention rate is the percentage of users who continue engaging with an app over time. This app metric is typically measured at 30 days, 7 days, and 1 day after users first install the app. App retention rate is calculated by dividing an app's monthly active users by its monthly installs.

To calculate net revenue retention, subtract lost revenue (revenue churn and account contraction) from total revenue (starting recurring revenue plus account expansion) and divide by your starting amount. Say you're calculating your NRR for April 2022.

The increasing revenue trend is evidence of the company's sustainability and profitability. It's typical for many startups to grow fast in the early stage, with the ARR growth by 144% on average. As the company matures, the growth rate slows down and falls into the 15% to 45% year-to-year growth range.

SaaS Magic Number FAQs

Your SaaS magic number should be as high as possible, but any number above 0.75 is a good benchmark for your company. A magic number below 0.5 indicates problems with your business model, while a magic number between 0.5 and 0.75 should cause you to reconsider your growth investments.