Net revenue retention

Net revenue retention, or NRR, answers one question: if you took the customers a company had twelve months ago and looked at what they pay today, would the total be higher or lower? It counts upgrades, extra seats, add-on products and price rises as gains. It counts downgrades and cancellations as losses. It leaves out revenue from customers who joined during the year.

An NRR of 100% means the group pays exactly as much as before: gains offset losses. Above 100%, the group pays more. Below 100%, it pays less. Some companies call this net dollar retention, since many Indian software firms sell in US dollars, but the idea is identical.

Take the recurring revenue from a group of customers at the start of a period, say ₹10 crore. Add the extra revenue from upgrades and expansion from that same group over the period. Subtract the revenue lost to downgrades and cancellations. Divide the result by the starting figure.

The formula is: (starting revenue + expansion - contraction - churn) divided by starting revenue. Do not include any customer who was not in the starting group. NRR is typically measured over twelve months, though some companies report it on a quarterly basis. Always check the period and the definition, because the details differ between companies.

• Start: recurring revenue from customers a year ago
• Add: expansion (upgrades, extra seats, add-ons, price rises)
• Subtract: contraction (downgrades) and churn (cancellations)
• Divide by the starting revenue; leave out new customers

Gross revenue retention, or GRR, counts only the losses: it takes the starting revenue, subtracts churn and contraction, and ignores expansion. It can never be above 100%. So GRR tells you how leaky the bucket is, and NRR tells you how much the existing customers grow after the leaks.

Both are useful together. A company with an NRR of 115% and a GRR of 70% is losing many customers, but a few big ones are growing so fast that they cover it up. That is riskier than a company with NRR of 110% and GRR of 92%. When a company quotes only NRR, ask about GRR.

Many investors treat 100% as the line between a leaking business and a growing one, and 110% to 120% as strong for business software. Figures above 120% are seen in some of the fastest-growing companies, especially those whose pricing rises with usage. Below 90% usually signals trouble with customer satisfaction or fit.

These are rough guides. A company selling to small shops, who often go out of business or switch plans, will have lower NRR than one selling to large firms on multi-year deals. Compare with similar companies and look at the trend. An NRR that is slipping year by year is a warning even if the number is still above 100%.

Because it shows growth that costs little. If existing customers expand each year, the company grows even without winning anyone new, and the money spent on winning customers has a higher payoff. Such a business can grow with less outside funding and has a better chance of reaching profit.

NRR also supports a higher valuation. A software company with strong NRR is seen as having a durable base, so investors may be willing to pay a higher multiple of its recurring revenue. This links directly with ARR: ARR shows the size of the recurring base and NRR shows what direction it moves in without new sales.

The most common distortion is a handful of large customers. If three big accounts expand sharply, NRR can look strong even if most customers shrink. Another is price rises: a company can lift NRR once by raising prices, but that cannot be repeated year after year without driving customers away.

Definitions can also be loose. Some companies measure on a trailing twelve-month basis, others only include customers above a certain size, and some include usage fees that vary. Others mix in customers who joined partway through the year. Because there is no audited standard, treat NRR as a company-reported figure, and prefer companies that explain how they calculate it.

When a story says a company has NRR above 100%, treat it as a positive signal about existing customers, then check three things: the period, the definition and whether gross retention is given too. A single figure without any of these has little meaning.

Look also at how fast the company is adding new customers. High NRR with slow new sales means a healthy but small base. High NRR with fast new sales is the pattern investors like most. NRR is one tool among several, so read it with ARR, churn and margins.

Yes. Many Indian software companies sell to customers in the United States and Europe and bill in dollars. Their NRR is usually measured in dollars, which removes the effect of exchange-rate moves on the result.

If a company reports NRR in rupees, a weaker rupee can raise the figure without any change in customer behaviour. Check which currency the figure uses before comparing two companies.