NRR

What it means

NRR, net revenue retention, measures how much recurring revenue a company keeps from its existing customers over a period, usually a year. Expansions and upgrades, downgrades and churned customers are counted; new customers are not.

The calculation starts from the MRR or ARR of the customer group at the beginning of the period. Expansion is added, contraction and churn deducted, and the result divided by the starting value. Above 100 per cent means existing customers together pay more than a year ago.

For companies with a subscription model, NRR is one of the most important metrics. A company with NRR above 100 per cent grows even without winning a single new customer, and investors value it considerably higher.

How it works in practice

In reporting for SaaS and services with recurring billing, we calculate NRR from invoicing data broken down by customer. New customers must be clearly separated from existing ones and one-off charges from recurring revenue.

NRR works well alongside cohort analysis. NRR gives one summary figure, while cohorts show which customer groups are growing and which are leaving, and help find the cause.

In talks with investors NRR is often compared with the sector. A high NRR with few customers may, however, be driven by a single large client, so we recommend presenting it together with revenue concentration.

What to watch out for

A common mistake is including new customers or one-off services in the calculation. NRR then looks better than reality, and in due diligence the investor recalculates it and loses faith in the other numbers.

The second risk is watching only NRR and missing gross retention without expansions. A company can have NRR above 100 per cent thanks to a few growing clients while most others are leaving. Both metrics should be tracked together.