Category: BLOG, KPIs Library.

Net Retention Rate (NRR) is a crucial KPI for any business. It measures the percentage of customers who continue to make purchases after their initial purchase. By improving this metric, your company will see increased revenue and profit margins over time.

This article will discuss how you can measure net retention rate in different ways, as well as what actionable steps you can take to improve it in your business.

Anything that is measured and watched, improves.

What is Net Retention Rate?

Net Revenue Retention is a very important metric in SaaS companies. This measure calculates the health of your business based on existing customer retention rates, as well as how successful you’ve been at generating additional revenue from these customers after they’re already committed to staying with you.

You can also refer to NRR as net dollar retention.

This metric is very similar to the gross dollar retention rate, which calculates how much revenue you generate from existing customers. You can calculate NRR by comparing your monthly recurring revenue (MRR) with customer churn rates.

How to measure Net Retention Rate?

There are many ways you can measure NRR. Here’s how to calculate it using all three common methods:

Monthly Recurring Revenue

This is the easiest way to calculate NRR. Simply compare your current MRR with revenue from new customers you add each month (also known as net-new revenue).

To calculate MRR, take the total amount of money your customers have paid you in their lifetime as a client and divide it by how many months they’ve been with your company. This will give you an average MRR per month for your customers.

Then, take your churn rate and divide it by the MRR. This will give you your NRR percentage.

NRR
=
Churn Rate x 100 MRR

The second way to measure NRR is by using customer lifetime value (CLV). CLV measures how much a customer is worth over the course of their entire relationship with your company.

You’ll need your customer lifetime value in order to determine the average revenue per user over a given time period, which is used to find NRR.

To calculate CLV, you’ll need to know your customer acquisition costs (CAC) and average customer lifetime value.

Once you have these figures, divide CAC by CLV. This will give you your NRR percentage.

NRR
=
CAC x 100 CLV

Customer Churn

The final way to measure NRR is by using customer churn. This measures the percentage of customers who leave your company within a given time period.

To calculate churn, identify the total number of customers you lost in a given time period. Then, divide this figure by the total number of customers you had at the beginning of that same time period. This will give you your churn rate percentage.

Churn Rate (%)
=
Number of Lost Customers x 100 Total Number of Customers

You can also calculate your NRR by taking the total recurring revenue and dividing it by churn rate (customers who cancel in that same month or quarter).

This will give you an idea of how much revenue was retained from existing clients, which is useful for tracking progress and goal-setting.

NRR
=
MRR Churn Rate

All these methods are important in understanding how healthy your business is. However, using MRR is more common because it’s easier to calculate and compare.

What is the Typical Net Retention Rate?

There’s no one right answer when it comes to NRR. Depending on the industry and company size, the average retention rate can vary. In most cases, you’ll want to aim for at least a 70-80% NRR in order to be successful.

Standard Procedure of Calculating Customer Retention

Additionally, you should also learn how to calculate customer retention. This makes it easier to calculate and track NRR.

The first step is determining the time period you want to know the customer retention of. This period can be a week, a quarter, or even a whole year. Some organizations, such as SaaS companies, may even calculate customer retention on a daily basis. That’s because they have user bases that fluctuate quickly.

Next, you need to collect three simple pieces of information:

The number of existing customers at the start of the period(S), the number of customers at the end of the period (E), and new customers added within the period (N).

Once you have this data, plug it into the following formula to calculate the net retention rate:

Net Retention Rate
=
(E-N) x 100 S

This percentage can give you an idea of how many of your customers are staying from one period to another. However, it’s important to remember that this calculation is only as accurate and timely as the data you use. Make sure to keep your customer database up-to-date, so you have accurate information for calculating retention rates.

12 Ways to Improve the Net Retention

Customer retention is an integral part of any business. As you grow and your total number of customers increases, it’s only natural that the number of unhappy customers will increase as well. That’s why it’s so important to dedicate time and resources to delight your customers.

Dissatisfied customers can be a large problem for your business as it costs significantly more to acquire new customers than it does to retain existing ones. While it’s impossible to guarantee all of your customers will be satisfied and stay with the company, there are some creative ways you can increase customer retention rate:

1. Offer Quality Services & Products

The first step to improving your net retention rate is to make sure you offer the highest-quality services and products possible. This may seem like a no-brainer, but it’s something that many businesses struggle with maintaining as they experience growth and attempt to scale their company.

If customers are unhappy with the goods or services they’ve received, they are likely not to come back to the company. Additionally, they may tell their friends or post negative reviews of their experience online.

The best way to avoid this is by offering high-quality products and services from the very beginning and make quality control a top priority for your company.

2. Give Discounts

One of the best ways to encourage customer loyalty is by offering discounts. Take a look at what your competition is doing and try matching their offer or come up with your own incentive plan to discourage your customers from leaving.

You might give out coupons on social media sites or have a loyalty program where customers can earn points for each purchase they make.

The key is to find something that your customers will appreciate and will want to take advantage of.

3. Involve them in Decision Making

To encourage customer retention, you can also make customers feel like they are a vital part of the decision-making process.

This means allowing them to have a say in big decisions that affect their experience with your business, as well as letting them know when changes will be made and why they’re happening.

By opening a simple line of communication like this with your customers, you can increase your customer retention rate because it communicates that you value their input and opinion.

4. Send handwritten thank you notes: Thank them for their Patronage & Loyalty

A handwritten thank you note can go a long way in increasing your customer retention rate. While many might consider this old-fashioned, the time and effort that goes into producing them can communicate a company’s dedication.

It shows that you appreciate their business and took the time to send them a personalized note. Plus, it’s a great way to stand out from the competition.

5. Make it easy for them to Contact You

Another way to increase customer retention is by making it easy for customers to get in contact with you. A great way to do this is to have a chat feature available on your site, prioritize having 24/7 customer service, and clearly list out how they can get in touch with you by phone, email, or social media.

It also means responding to their inquiries quickly and providing quality customer service. If customers are facing an issue with your product or service, they’re more likely to stick with you after it’s resolved if they receive prompt, helpful service.

6. Offer Free Samples & Promotions

If someone is on the fence about buying from your company and trying out your products or services, a great way to get them to take the plunge is by offering free samples.

You can do this in person or online. It’s a great way to show customers that you’re confident about what you’re selling.

In addition, you can also run promotions from time to time as an added incentive for people to shop with you. This could be something like a buy one get one sale or even an offer for free shipping if they purchase within a certain time period.

7. Host Giveaways & Contests

If there’s anything that people love, it’s winning prizes and giveaways. By hosting giveaways and contests on your social media sites or website, you can drum up a lot of interest and excitement.

Not only will this get people to visit your site or follow you on social media, but it will also help increase customer retention rate as they’ll be more likely to come back in the future if they don’t win this time around.

8. Make Customer Service a Priority

One of the most important things you can do to increase customer retention is to make sure that your customer service is top-notch.

This means having a team of friendly and helpful employees and being available to help customers when they need it.

If customers have a negative experience with your company, the first thing they’re likely to do is to contact customer service. So, you must have a system in place that can help resolve the issue as quickly and painlessly as possible.

9. Create a Unique Brand Identity

When people think of your company, you want them to think of something specific that sets you apart from everyone else. This could be through your products, services, or even how you market yourself.

Whatever it is, make sure that your branding is consistent across all platforms and accurately represents who you are as a business. It will help customers remember you better and be more likely to come back in the future.

10. Take Advantage of Social Media

Social media is a great way to connect with customers and keep them up-to-date on what’s going on with your company.

You can use social media to post about new products, upcoming sales, or to feature employees so that customers can put a face to the business.

By using social media, you can keep customers engaged with your brand and help increase customer retention rates at the same time.

11. Encourage Customer Feedback

One of the best ways to find out what customers want is by asking for their feedback. Asking for customer feedback is a sign of great customer service, and demonstrates that you want to improve and deliver the best possible experience for your customers. You can ask for feedback via social media, email, in person, or over the phone.

By understanding what customers are thinking and how they are feeling, you can make the changes they’re looking for. By continually asking for feedback over time, you’ll be able to improve your products or services on an ongoing basis, reminding customers that you are constantly working to deliver a better experience.

12. Listen to Feedback & Take Action

Another way to increase customer retention is by listening to feedback and taking action. That means you need to have a system where customers can give feedback easily and quickly act on that feedback.

If customers feel like their voices are being heard and can make a difference, they will be more likely to stay loyal to your company.

Plus, it’s always a good idea to get feedback from customers so you can see what they like and don’t like about your business.

The Bottom Line

Net retention rate is a key KPI that all companies should measure to determine what areas need to improve. Companies need to prioritize monitoring their net retention rate and work on ways to increase it. A company’s business health relies heavily on this KPI, so maintaining a high retention rate is vitally important to the long-term success of your company.

If you’d like to use software that helps you track KPIs, measure progress, and transparently outline your quarterly goals, look no further than Profit.co. You can get started with a 30-day free trial, or book a free demo with our OKR experts today!

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