Beyond Revenue: Why Net Revenue Retention Is Your Company's Vital Sign
- gandhinath0
- Apr 7
- 3 min read
Updated: Apr 11
You've probably heard people throw around the phrase "grow or die" in business. While that's a bit dramatic, there's some truth to the idea that most companies are in constant motion.
I've spent years working with startups and established firms, and I've noticed one metric that keeps coming up in conversations about company health: Net Revenue Retention (NRR).
What NRR Metric Really Means
Think of NRR like a health check for your business. It shows you, in plain numbers, whether your existing customers love your product enough to stick around and spending more or less money with you compared to last year.
The formula*:
NRR = (Starting Revenue + Expansion - Contraction - Churn) / Starting Revenue × 100%Let's break this down with real-world example:
Element | What It Means | What your Numbers Speak |
Starting Revenue | Your baseline monthly revenue from all current customers | 100 customers paying $10/month = $1,000 total |
Expansion Revenue | Additional revenue when existing customers spend more (upgrades, add-ons) | 10 customers upgrade to $15/month, adding $50 |
Contraction Revenue | Decrease in revenue when customers reduce their spending | No customers downgraded this month = $0 lost |
Churn Revenue | Lost revenue from customers who completely cancel | 20 customers cancelled, losing $200 |
NRR Calculation* | (Starting + Expansion - Contraction - Churn) ÷ Starting × 100 | ($1,000 + $50 - $0 - $200) ÷ $1,000 × 100 = 85% |
In simple terms: If your NRR is 85%, it means that for every $100 you made last month, you're now making $85 from the same group of customers. This happens because while some customers spent more money (expansion), others cancelled (churn).
That 85% NRR means you're BLEEDING revenue from existing customers!
Are you checking your NRR at significant times?
Monthly Check if | Yearly Check if |
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Now, you may be wondering what if you are just starting out?
Check monthly but don't panic if the numbers jump around. When you only have a few customers, one cancellation can make things look worse than they are.
CASE STUDY: How Peloton's NRR Predicted Everything about Existing Customers
Year | NRR | Phase | Insight Summary |
2019–2020 | 87.5% | Product-Market Fit | Expensive to grow, Market size unknown |
2020–2021 | 117.5% | Pandemic Surge | Unnatural spike in demand |
2021–2022 | 107.5% | Peak + Plateau | Momentum slowing, false confidence |
2022–2023 | 97.5% | Reality Check | Customer fatigue, core cracks |
2023–2024 | 87.5% | Structural Crisis | Unsustainable model exposed |
Peloton stock (NASDAQ: PTON) dipped when NRR dropped below 100%. COINCIDENCE? Absolutely not.
Data Sources:
2019-2020 figures based on Peloton's S-1 filing which reported Average Net Monthly Connected Fitness Churn of 0.70% to 0.90%[1]
2020-2021 data derived from Q3 2021 earnings showing record low churn of 0.31% during pandemic[2]
2021-2022 figures from FY2022 reports showing churn increasing to 0.73-0.80%[3]
2022-2023 data from Q2 2023 earnings with reported churn of 1.1%[4]
2023-2024 metrics from Q4 2023 report showing elevated churn of 1.4%[5]
[1] SEC Filing S-1, Peloton Interactive, Inc., August 2019
[2] "Peloton sales grow 141% in Q3, the lowest churn in 6 years," Connect the Watts, May 2021
[3] "Peloton shares fall after cycle maker posts disappointing earnings," CNBC, August 2021
[4] "Peloton Sees Major Progress in Q2 FY2023," Subscription Insider, February 2023
[5] "Peloton Reports a Drop in Revenue and Subscribers in Q4 FY2023," Subscription Insider, August 2023
Real Quick Guide to What Your NRR Should Look Like
Growth Stage | Power Users | Regular Users | Casual Users | New Users |
Validation Seekers ($1M-$2M ARR) | 35-45% | 20-30% | 10-15% | 5-10% |
Traction Builders ($2M-$4M ARR) | 45-55% | 30-40% | 15-20% | 10-15% |
Scale Preparers ($4M-$7M ARR) | 55-65% | 40-50% | 20-30% | 15-20% |
Growth Accelerators ($7M-$10M ARR) | 65-75% | 50-60% | 30-40% | 20-30% |
Expansion Navigators (>$10M ARR) | 70-80% | 60-70% | 40-50% | 30-40% |
What Your NRR Says About Your Business
When NRR drops below 100%, it often signals revenue challenges from your existing customers; which is a natural part of the business cycle.
Start with simple list given below to address the problems factoring NRR -
Analyze your data - different customer segments usually tell different stories
Study why customers leave - exit interviews and usage patterns reveal key insights
Focus on retention - it's generally cost-effective than acquisition
Expansion opportunities - tap potential within existing accounts
Sometimes the smallest changes in your retention strategy can lead to the biggest improvements in your business growth.
...But here's something to remember prior to metric-paralysis:
Context Matters - Market conditions and industry standards influence what "good" retention looks like.
Need Help to Improve Your NRR for your Startup?
Ready to optimize your Net Revenue Retention and drive sustainable growth for your SaaS business?
Use our free diagnostic tool to gain insights into your Net Revenue Retention and identify areas for improvement.
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