Net Revenue Retention (NRR)
Why it matters
NRR shows whether the customers a business already has are worth more or less over time. Plain customer retention only counts who stays. Ninety per cent of accounts can still stay while NRR falls, if those who stay spend less. A business with fifty customers at 130 per cent is in better shape than one with five hundred at 80 per cent. Investors and buyers look at NRR closely for this reason.
How to apply it
- Calculate it from billing data automatically, not in a spreadsheet rebuilt each quarter.
- Pair it with gross dollar retention, which ignores expansion. In the example, that figure is 88 per cent, because only the downgrades and cancellations count.
- Split it by customer segment, product and account owner to see where expansion and losses concentrate.
- Check that pricing captures growth inside an account. A flat fee per organisation hides it.
- Review it monthly, and look at cohorts of customers who joined in the same period.
What it is
NRR takes the revenue from a group of customers at the start of a period, usually 12 months, and asks what that same group pays at the end. The formula is starting revenue plus expansion, minus downgrades and cancellations, divided by starting revenue. Revenue from customers who joined during the period is left out.
Say customers paid £100,000 a month at the start of the year. Over the year they add £22,000 through upgrades and extra seats, downgrade by £4,000 and cancel £8,000. They now pay £110,000, so NRR is 110 per cent.
You will also see the same figure called net dollar retention. Some companies calculate it over a different period or with different rules for usage fees, so when comparing figures, check how each was worked out.
Common mistakes
- Including revenue from new customers, which inflates the figure.
- Reading one very large account as a sign the whole base is healthy.
- Mixing one-off fees with recurring revenue.
