Recurring revenue is a powerful foundation on which to build a business. The durability and scalability of the business model is evident through some of the top publicly traded Cloud/Technologies are built on 80% or more recurring revenue, including:
- Adobe (90% Recurring Revenue, $11.1B in 2019)
- EcoLab (90% Recurring Revenue, $14.9B in 2019)
- Netflix (100% Recurring Revenue, $20.1B in 2019)
- Chegg (80% Recurring Revenue, $500M in 2019)
One element of recurring revenue that is crucial for startups to understand as they scale is Net Revenue Retention (NRR for short), or how much of that recurring revenue you are retaining and expanding.
The formula for NRR can always be found on our SaaSy Math page, but we copied it below for this post:
NRR = (Initial MRR - Churn (Cancelled) MRR - Downgrade MRR + Expansion (Upsell or X-Sell) MRR) / Initial MRR
NRR is looking at revenue over a given time from a set number of customer subscriptions and telling you how much revenue from those same subscriptions you are still capturing over time (typically looked at monthly or annually). This analysis is crucially important for recurring revenue businesses especially those that are built on the product-led growth model which relies on the customer to typically start with a low cost self-serve product and then once value is realized over time, expand their subscription to include more products, usage, licenses or any combination of those. Asana, which recently filed it’s S-1 ahead of its IPO explained how this model lead to their success in a quote directly out of their filing, “ Our hybrid self-service and direct sales model allows us to… rapidly expand the use of our platform with their organization… Our overall dollar-based Net Revenue Retention rate as of January 31, 2020 was over 120%”. This quote highlights the impact that recurring revenue and strong net revenue retention can have when scaling a subscription startup.
The best place to start to understand your Net Revenue Retention is your billing/subscription management system such as Stripe or Zuora. Look at groups of customers (isolate their subscriptions IDs) and see how much revenue they were paying you a month or a year ago, and then compare that to how much that same set is paying you today.
For most tech companies about to IPO, we typically see NRR numbers 100% or more, but don’t fret if your numbers aren’t that high, for earlier stage companies lower NRR numbers are ok as you are still finding PMF. Focus on segmenting your customers to find the ones who’s NRR numbers are higher, in that 100% range, and operationalize your team and company around them.