NRR Year over Year or Last 12 months??

Miranda Balcar

Hi everyone,

Over the last year I've calculated NRR by taking our ARR from last year (December's revenue x 12) and comparing that to each month of this year. This December will give us 2023's overall NRR.

However, my finance team is challenging that. They are taking each month's revenue and comparing it to that month's revenue last year. (Aug 23 over Aug 22 instead of Aug 23 over Dec 22).

Additionally, our overall company performance metric is based on the average of the last 12 months, not year-over-year ARR.

I thought the way I calculated it was most common. Any insights would be appreciated.

Thomas.Smeallie

The SaaS CFO (https://www.thesaascfo.com/quantifying-investments-in-customer-success-and-retention/) has a lot of good content on these topics.

I've always calculated NRR as "what is the ARR entering the period (be it month, quarter or year) and then what is the total ARR coming from customers ending the period" Exclude ARR from new customers, aka new biz sales.

EG

I enter 2024 with $10m in ARR (customer revenue). I lose $1m in ARR during 2024 (my gross revenue retention is therefore 90% on the year) but I see significant growth from the other customers and my customer ARR grows to $12m.

My NRR on the year would therefore be 120%

Now, it's important to note again that I'm only looking at the customers I had January 1st (the $10m) and new accounts signed on during 2024 do not influence my NRR figures for the year.

Thomas.Smeallie

Reality is, even publicly traded companies write their own rules when it comes to defining NRR...

https://www.linkedin.com/posts/chris-regester_mostlymetrics-made-this-summary-of-public-activity-7121100266690490369-LiTN?utm_source=share&utm_medium=member_desktop

Ed Powers

@Miranda Balcar, I recommend to my clients that they prepare two sets of metrics, one that reconciles the numbers for the financial community, and one that demonstrates the impact Customer Success has on outcomes. They are not the same.

Regarding ARR, keep in mind that there's a big difference between booked and recognized revenue. A $12 order (ACV) booked on January 1 is the same as $12 in recognized revenue (ARR), but a $12 order booked on 12/1 is only $1 in ARR. Timing matters, and Sales and Customer Success deal in the world of ACV whereas financial folks deal in ARR (the income statement). This alone distorts any conclusions people draw from any comparisons, year-over-year or otherwise. Now add to this the effects of discounts, price changes, wide (power law) variation in amounts between large and small accounts, and small monthly sample sizes, and all you are seeing is noise, not meaningful signals.

Don't use financial statements to make operational decisions. Instead, track customer behaviors using statistical control charts to precisely detect changes, despite the noise. With the right analytical tools, you can ensure your leaders are making the right decisions instead of leaping to the wrong conclusions.

Happy to chat more, if you'd like.

Ed

Miranda Balcar

Thank you everyone! This has been incredibly helpful.

@Ed Powers I'd love to chat more about this. While I do need to settle on the final NRR for the year, I also need to determine our monthly NRR. That's one metric that our finance team is calculating differently than other companies, from what I'm reading. We issue bonuses H1 and EOY, and this will affect that calculation.

tejash_24

Interesting answers !!! @Miranda Balcar your problem is a typical one . There has always been a difference of opinion on methods of calculation between Sales and CS Ops.

I personally would say that you continue with your logic and align it with their definition to come to same page. See we have to understand that their way of looking things are different then ours.

Second suggestions I have is to come to a common ground of methods for presenting numbers in future so you wont have difference of opinion.

To calculate NRR, you need to consider the following components:

1. Starting Monthly Recurring Revenue (MRR): The total revenue generated from all existing customers at the beginning of a period.

2. Expansion MRR: This represents additional revenue generated from existing customers during the period through upselling, cross-selling, or increased usage.

3. Contraction MRR: This is the revenue loss due to downgrades, customer reductions, or other negative changes in customer subscriptions during the period.

4. Churn MRR: The MRR lost from customers who have canceled or churned during the period.

The formula for calculating NRR is as follows:

NRR = [(Starting MRR + Expansion MRR - Contraction MRR) / Starting MRR] * 100

Elizabeth Italiano

@Miranda Balcar I agree with what Ed is saying. It's important to partner and align with finance but also define the purpose of measuring in certain ways. Finance teams need to calculate for financial statements and GTM teams need to measure for efficiency, impact, revenue, etc. Who in finance are you working with? A senior leader or junior accountant? Their knowledge on SaaS economics and who needs to measure what and how could differ on their experience level.

Miranda Balcar

@tejash_24 I guess where I'm getting hung up is the period of time. I understand the standard formula, but what is the period of time?

This Nov vs last Nov OR this Nov over this Oct OR this Nov vs EOY last year? That's the question I can't seem to find the answer to.

Joel

Hey @Miranda Balcar

Here is a link to the Revenue Retention Calculator that I have used and that we've published. Based on your project, I thought you may find it useful. You have to use some sort of Google / Gmail creds to access it. If you have any issues, let me know and I will get it to you some other way.

https://docs.google.com/spreadsheets/d/1x2AJ6QWx9Y1_AdNlGWi-c-NrIXqxI0LJVe5XWFlaPsg/copy

Joel