Net Revenue Retention
Net revenue retention (NRR) is the amount of revenue that a company retains after including expansion (new customers and upgrades to bigger plans: silver → gold), contractions (downgrades to smaller plans: gold → silver) and cancellations.
As a single metric it includes everything related to the changes in the MRR and is usually expressed as a percentage, in this case it is called Net Revenue Retention Rate.
Real world case
Let’s apply the formula to an example company. Let’s say that our company has 100 subscribers at $50/month, so our MRR is 100 * 50 = $5,000. In this same month, we add 25 new subscribers (all at $50/month), which equates to 25 * 50 = $1,250, then 5 subscribers upgrade to a bigger plan going from $50/month to $100/month, our Expansion is (5 * 100) - (5 * 50) = 500 - 250 = $250. We then have 2 subscribers than downgrade to a smaller plan, going from $50/month to $10/month, our Contraction is (2 * 50) - (2 * 10) = 100 - 20 = $80. And finally, we have 5 cancellations, all from the standard plan, so our Churn is 5 * 50 = $250.Putting it all together with the above formula we have
A net revenue retention rate bigger than 100% means that your business is growing, while a NRR lower than 100% means that your business is shrinking.
How to improve Net Revenue Retention
Once you understand the formula you see that there are four levers that can be pulled:
- New MRR: get more paying subscribers, obviously!
- Expansion: nurture and upsell your existing customers to bigger plans (it's often cheaper to upsell your current customers than it is to gain new customers)
- Contraction: reduce the number of users that downgrade to smaller/cheaper plans
- Churn: improve your retention and reduce churn
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