Net Revenue Retention: Key SaaS Metric or Disguise for Disappointing Performance?

Net Revenue Retention Definition: Net Revenue Retention (NRR) for Software-as-a-Service (SaaS) companies is defined as the (Starting Recurring Revenue + Expansion Revenue – Churned Revenue) / Starting Recurring Revenue; it indicates how much the company’s recurring revenue from existing customers is growing in each period.

This metric also goes by slightly different names, such as “Net Dollar Retention” and “Net Dollar Revenue Retention,” but they all refer to the same concept.

Many people point to Net Revenue Retention (NRR) as a key SaaS metric, but they overlook its problems and how it is often impractical to use for public companies.

Like many other financial metrics, the NRR percentage itself does not mean much; what matters are its individual components.

In other words, the “why” matters much more than the “what.”

Two companies can have the same Net Revenue Retention percentage, but one could have a more stable underlying business because of the individual components:

Since most public SaaS companies do not disclose these individual components, using Net Revenue Retention as a meaningful metric in real life is difficult.

If you’re in this situation – no access to the individual components of NRR – you could use the Gross Revenue Retention as a supplemental metric.

Files & Resources:

• Net Revenue Retention – Slides (PDF)
• Net Revenue Retention Examples (XL)
• Monday.com Investor Presentation (PDF)

Video Table of Contents:

• 0:00: Introduction
• 0:45: The Short Answer
• 4:38: Part 1: Simple and Complex Calculations
• 7:40: Part 2: Gross vs. Net Revenue Retention
• 8:55: Part 3: What’s a “Good” Net Revenue Retention?
• 11:27: Part 4: Why AI Companies Make This Metric More Important
• 13:01: Recap and Summary

How to Calculate Net Revenue Retention

The basic calculation is simple: Take the initial recurring revenue in the period (Annualized Recurring Revenue or Monthly or Quarterly Recurring Revenue), add the revenue from expansions (upsells, price increases, etc.), and subtract revenue lost from churn (cancellations) and downgrades:

It gets slightly more complicated if you’re working with customer-level data rather than high-level metrics.

If you have access to information on individual customer spending, you can set up SUMIFS formulas that directly compare the year-over-year dollars spent to determine the Net Retention Rate by customer or industry segment:

Since publicly traded SaaS companies do not disclose information this detailed, these calculation methods are viable only when you have access to proprietary data from the company (e.g., you are potentially investing in it or advising it in a deal).

Gross vs. Net Revenue Retention

A closely related metric is Gross Revenue Retention, which ignores New Customer and Expansion Recurring Revenue:

Gross Revenue Retention = (Starting Recurring Revenue – Churned Revenue) / Starting Recurring Revenue

You can see examples for our simple SaaS startup below:

Gross Revenue Retention is useful because it focuses on the downside risk in the company’s revenue because it’s affected only by cancellations.

Using these two metrics together tells you how dependent a company is on extracting more value from its existing customers.

For example, consider Companies A and B, with the same Net Revenue Retention but very different components and Gross Revenue Retention numbers:

If you didn’t have access to the individual components of NRR, you might never realize how Company B is a more stable business due to the much lower Churn Rate – but if you have the Gross Revenue Retention metric, you can at least get a hint.

Why Net Revenue Retention Can Be Deceptive or Impractical

Unfortunately, publicly traded SaaS companies rarely disclose the calculations behind their Net Revenue Retention numbers.

They love to tout their numbers, especially if they’re over 100% for many periods, but they rarely disclose the details behind them.

This makes NRR not especially useful in real life unless the company is a client or potential investment, and you have access to its internal financial information.

Looking at the lump-sum NRR number without breaking it into segments, such as by average customer value or industry, also disguises potentially concerning trends:

What is a Good Net Revenue Retention Rate? How Do You Interpret It?

Most SaaS companies aim for Net Revenue Retention rates above 100%.

If they can achieve this, their revenue must stay the same or increase in the period.

It stays the same if they win no new customers in the period and increases if they win even one new customer.

According to SaaS Capital surveys, the median Net Revenue Retention Rate is 102%, and the median Gross Retention Rate is 91%.

A higher Net Revenue Retention Rate also leads to higher revenue growth, which tends to produce higher valuation multiples (such as Enterprise Value / Revenue or Enterprise Value / ARR). It may also affect metrics like the Rule of 40.

Net Revenue Retention tends to be lower for consumer SaaS companies and firms selling lower-priced products/services to small businesses.

Revenue from small businesses and consumers is easier to “win” than contracts for $100K or $500K per year with huge companies, but it also goes away more easily when consumer spending or small-business confidence falls.

As an example, here’s Monday.com’s Net Revenue Retention by quarter over the past few years:

Our interpretation is that there was a “COVID bump” as companies and individuals stayed inside and spent more money on online products and services, resulting in lower cancellation rates and more upgrades to higher-priced plans.

However, companies reassessed their spending and business needs as the world opened up again, and cancellation and upgrade rates returned to their normal levels.

The most concerning point is that the NRR seems to have fallen the most for the highest-spending customers – those with ARRs above $100K.

This is a negative sign because this segment has also been growing quickly, and the retention metrics should be better for these large enterprises.

We need to complete a full analysis of the company’s financials to say anything more substantial, but our quick impression is that despite the company’s impressive revenue growth, its Net Retention Rate metrics point to possible risk factors.

Why AI Will Make Net Revenue Retention Even More Important

Many AI companies have generated buzz for reaching high revenue levels very quickly.

But the saying “Easy come, easy go” is appropriate here.

Since it’s faster and easier to create these products and services, there’s also far more competition, and customers can easily switch to different providers.

Companies have studied this phenomenon and found that AI vendor churn is often 30 – 40% (source), which is far higher than the traditional ~10% for enterprise software.

Many AI companies can offset this high cancellation rate by winning enough new customer accounts.

But eventually, especially as the market matures, investors will likely pressure them to disclose their Gross and Net Revenue Retention metrics in more detail – or at least provide the cancellation rates.

Without that detail, simple growth rates and the Net Revenue Retention metric alone can disguise many underlying problems with a business.