In addition to attracting new customers, many companies strive to expand relationships with clients who are already purchasing their products and services. Net revenue retention has become one of the most important drivers of success for many businesses.
Definition
What is net revenue retention?
Net revenue retention is a comparative metric that tracks average spending from the same customers across two time periods. In most cases, net revenue retention will compare sales from customer pools annually or across the same quarter in different fiscal years.
When customers increase their average spending, a company's net revenue retention rate will be above 100%. For example, a company will have a net revenue retention rate of 105% in a given period if its retained customers have increased their spending an average of 5% year over year. Alternatively, posting a net revenue retention rate of 95% would mean that sales among that customer cohort had actually declined 5% compared to the prior-year period.
How does it work?
How does net revenue retention work?
Net revenue retention tracks spending among customers who have continued to use a company's services. If a company is able to increase average spending from its retained customers across comparable periods, it will have net revenue retention above 100%. This can be done by raising the prices of its services or by selling additional offerings to existing customers.
Spending from new customers in a given fiscal quarter does not factor into a company's net revenue retention rate. Additionally, the difference in spending that results from former customers ceasing to use a company's services is not included in net revenue retention calculations. As a result, a company can have net revenue retention above 100% and still record an overall sales decline if its total customer count shrinks.
Marketing Strategy
Why is it important?
Why is net revenue retention important?
If a business can record strong net revenue retention, it has a way to grow sales beyond just attracting new customers. Increasing spending from existing customers can also offer companies more efficient paths to growth. Rather than having to spend money on sales and marketing initiatives to attract new customers, businesses can expand relationships with clients who are already using their services.
Net revenue retention has become a particularly important metric to watch in the software industry. Many companies using the software-as-a-service (SaaS) model now concentrate on building out an encompassing ecosystem that offers multiple services on a subscription basis. Once a client has been brought into the ecosystem, businesses have opportunities to sell other services and can increase their net revenue retention.
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Example
An example of net revenue retention in action
CrowdStrike (CRWD -3.03%) is a cybersecurity company with a business model that revolves heavily around sustaining high levels of net revenue retention. The company has established a benchmark goal of having a net revenue retention rate of at least 120% each quarter, which means that it aims to grow spending by 20% annually among customers that are already using its services.
Customers purchasing additional services have helped the cybersecurity specialist record strong net revenue retention. For example, the number of customers using at least five of its service modules was up 52% annually at the end of its last fiscal year. Meanwhile, the number of clients using six or more modules was up 62%, and the number of clients using seven or more modules was up 75%.
In its last fiscal year, CrowdStrike actually managed to record a net revenue retention rate above 125% in each quarter. Along with 41% annual growth for the company's total customer count, this allowed the company to increase overall revenue by 54% in the fiscal year.
