Technology & SaaS M&A
5/13/2025
-
5
min read

NRR in SaaS: What Is It and Why It Matters for a Tech Business?

Ignacio Villanueva
By:
Ignacio Villanueva

Understand Net Revenue Retention (NRR) in SaaS—how to calculate it, why it matters for growth and valuation, and when it can give a misleading signal.

Table of Contents


Technology & SaaS M&A
5/13/2025
-
5
min read
About the author
Ignacio Villanueva
Ignacio Villanueva
Senior Director & Partner
Ignacio advises tech founders on sell-side M&A, with a focus on SaaS, marketplaces, and e-commerce. He brings sharp execution and deep sector insight.

It was November 12th, 2015 when Saas capital published an article about Net Revenue Retention (NRR) and the importance of this metric when analysing SaaS businesses. Back then, the article was probably one of the multiple articles that Saas Capital has published throughout the years. Looking back now, almost 10 years ago, this metric can be considered like the finest wine of Bungurdy, the central-east region of France, as it has only improved over the years.

Nowadays it seems almost impossible to try to understand the health of a SaaS business without taking a look at the NRR. This is because NRR is one of those metrics that can tell us a lot about the business and everyone seems to be aligned on this. 

In this article I will talk firstly about how to measure NRR properly and why this is such an important metric. Then, we will dive deeper into what is considered a good NRR and why NRR itself doesn't tell the full story.

How to measure Net Revenue Retention

Also known as Net Dollar Retention (NDR), NRR measures the percentage of recurring revenue retained from existing customers over a specific period, including:

  • Expansions (e.g. upgrades, cross-sells)
  • Contractions (e.g. downgrades, decreased usage)
  • Churn (e.g. cancellations)

An NRR above 100% means your existing customers are, on average, spending more over time on a dollar basis compared to the amount that they reduce from either churn or downgrades. 

The formula to calculate NRR is the following:

How to calculate Net Revenue Retention

Where:

  • Starting MRR = Monthly Recurring Revenue from a cohort of customers at the beginning of the period
  • Expansion MRR = Additional revenue from those same customers (e.g., upsells)
  • Contraction MRR = Revenue lost from downsells within the cohort
  • Churned MRR = Revenue lost due to customer cancellations

An important point to understand is that NRR only takes into account the new revenue generated by the customers used for the starting MRR. MRR generated by new clients is not included in these calculations. So if a business has only 1 client in the starting period, onboards 100 new customers but that 1st customer churns, the NRR will be 0.

An Example of NRR

Suppose you start January with $100,000 MRR from your existing customers. During the year:

  • You upsell $15,000 (Expansion MRR)
  • You lose $5,000 to downgrades (Contraction MRR)
  • You lose $15,000 due to customer churn (Churned MRR)

Your NRR would be:

This means that over a period of 12 months, for every $1 dollar you had at the beginning of the period, you are able to retain $0.95. This may not seem a big deal, but in the long term this can affect the company's ability to grow. This can also be interpreted as the need for constantly onboard new customers to grow. Depending on the total addressable market (TAM) you tackle and the competition, this might not always be an option. 

Why NRR in Saas is such an important metric

Understanding why NRR is such an important metric is the starting point to fix the issue if there is one or to double down your efforts to increase NRR in your organization. 

1. Measures true growth efficiency

NRR reflects how much revenue you're keeping and expanding from your existing customers. A high NRR (over 100%) means your company can grow without relying solely on new customer acquisition, which is more cost-effective and scalable. This is very attractive, specially for buyers as they don’t rely on acquiring new customers but rather focusing on existing ones can alone increase the value of the company.

2. Signals product-market Fit and customer satisfaction

When existing customers stay and spend more, it indicates that your product is solving real problems and delivering ongoing value. Low NRR can reveal customer dissatisfaction or weak engagement. A below market NRR doesn´t strictly mean that you don't have product market fit. It can also be related to your business model.

3. It is a key indicator for valuation and investment

Investors closely track NRR because it points to predictable, compounding revenue growth. A high NRR typically leads to higher company valuations, as it shows strong customer loyalty and revenue resilience.

4. Supports resilience in lean or competitive markets

In scenarios where customer acquisition is challenging, such as small TAMs or crowded markets, a strong NRR helps maintain growth by deepening value within your current customer base. This ensures healthier operations even under market pressure.

What is considered a good NRR: Benchmarks

Both Pitchbook and Yahoo Finance are excellent tools to track the performance of publicly traded companies and how that affects their valuation.  

From the above information  information, which also aligns with our own experience in the market we can provide the following conclusions:

NRR Performance Tiers

NRR Performance Tier NRR Range
Poor NRR < 90%
Low 90% < NRR < 100%
Good 100% < NRR < 120%
Great NRR > 120%

Here's a visual comparison of how a company performs with positive vs. negative NRR over 12 months:

  • Green line: A company with +10% NRR grows its MRR from $100K to over $300K.
  • Red line: A company with -10% NRR sees its MRR shrink to around $30K.

Here's a visual comparison of how a company performs with positive vs. negative NRR over 12 months:

  • Green line: A company with +10% NRR grows its MRR from $100K to over $300K.
  • Red line: A company with -10% NRR sees its MRR shrink to around $30K.

NRR itself doesn't tell the full story

While Net Revenue Retention (NRR) is often cited as one of the most telling metrics for SaaS businesses, it's important to recognize its limitations. NRR measures the ability to retain and expand revenue from existing customers, and while this can reveal much about customer satisfaction and product-market fit, it doesn’t always provide a full or fair picture of a company’s long-term health or scalability.

Case 1: Healthy growth despite a flat NRR

Take, for example, a company that sells multi-year licenses: contracts of one, two, or even three years, typically paid upfront. This company doesn’t rely on upselling or cross-selling; its value proposition is strong enough to sell once and sustain customer usage without needing to constantly drive expansion revenue. Most of its customers renew, and those that don’t often have reasons that are unrelated to the product; say, one customer goes bankrupt due to external financial pressures.

Because the company doesn’t upsell, and because one large customer churns, its NRR might dip below 100%, making it look stagnant or even in decline. But under the surface, the company is healthy, growing its Monthly Recurring Revenue (MRR) steadily through consistent new customer acquisition. It operates in a large and untapped market, giving it plenty of room to grow, even though its NRR fails to reflect that momentum. As an advisor, I’ve dealt with companies like this, and how we tell their story can make such a difference when we talk to buyers.  

Case 2: Flashy NRR, fragile retention

Now contrast that with another company that has a different story: it offers a lower-priced, accessible SaaS product that customers adopt quickly. The product is intentionally built to encourage early upgrades: within six months, many users opt into higher tiers or expanded usage. From an NRR perspective, this company looks like a superstar in its first year, boasting rates well above 110% or even 130%. But this initial growth masks deeper issues.

After about a year, many customers start to churn. The product may be easy to get started with, but it may not scale well or fully meet long-term needs. As a result, retention weakens over time, and the company struggles to build lasting customer relationships. Despite impressive short-term NRR, the long-term revenue base becomes unstable, and new acquisition has to work overtime just to keep overall MRR from stagnating or declining.

Why context matters more than a single metric

What these two contrasting examples show is that NRR can be misleading if used as a standalone measure of success. A business with seemingly flat NRR may be quietly compounding value through disciplined execution and a strong go-to-market engine. Meanwhile, a company with flashy NRR might be riding short-term enthusiasm that isn’t backed by durable customer value.

Without understanding the full business context (contract structure, product stickiness, churn timing, market size, and customer acquisition dynamics), NRR becomes just one piece of a larger, more nuanced picture. For investors, operators, and analysts alike, it’s critical to pair NRR with other indicators like gross churn, cohort retention, customer acquisition cost (CAC), and MRR trends to truly assess the health and trajectory of a SaaS company.

It is always important to understand what metrics drive value for both founders and investors. However, focusing on metrics and not having the ability to look at the bigger picture can backfire in some situations where metrics are not telling the full story.

 

Ready to put your NRR in context?

Net Revenue Retention is a powerful signal, but only part of the story. Whether you’re preparing for a strategic sale or assessing growth efficiency, interpreting NRR correctly can shape how investors view your business. Our team can help you frame your numbers with precision and insight. Contact us.

Disclaimer: The content published on L40° Insights is for informational purposes only and does not constitute financial, legal, or investment advice. Insights reflect market experience and strategic analysis but are general in nature. Each business is different, and valuations, deal dynamics, and outcomes can vary significantly based on company-specific factors and market conditions. For guidance tailored to your circumstances, reach out to L40 advisors for professional support.