Net revenue retention is a financial metric that measures the amount of revenue a company can retain over a given period. It is an essential indicator of a company’s growth and it’s sustainability and acts as a benchmark for determining its value and attracting additional funding. In this blog post, we take net revenue retention, how it is calculated, why it is essential for venture capital-backed startups, and what the founders can do to improve it.
About net revenue retention
Net revenue retention is a financial metric measuring the revenue a company can retain over a given period. It is calculated by dividing the current period’s net revenue by the net revenue from the same period in the previous year and expressing the result as a percentage. For example, if a company has net revenue of $100,000 in the current year and $80,000 in the previous year, its net revenue retention would be 125%.
Why should the founders follow the net revenue retention?
For several reasons, net revenue retention is an important metric for startups. First, it’s a key indicator of the company’s growth and sustainability. If a company can retain a significant portion of its revenue from year to year, it’s likely experiencing steady growth. On the other hand, it could be at risk of financial trouble if it’s struggling to attract and retain customers.
Trying to grow a company with bad net revenue retention is like trying to fill a bucket that has holes in it: No matter how much water you pour into the bucket, it is hard to fill it as most of it leaks off.
Taavi Lepmets, Partner at Trind
Another reason net revenue retention is essential for startups is that investors can use it as a benchmark for determining the value of a company. For example, suppose a startup has a solid net revenue retention rate. In that case, it is likely to be seen as a more attractive investment opportunity, as it suggests that the company can generate consistent and growing revenue streams.
Improving the net revenue retention
Improving net revenue retention is challenging, but there are several strategies that startups can employ to improve their net revenue retention rate.
When looking for growth, many founders are tempted to focus more on customer acquisition and less on retention. One of the reasons behind this is that it is generally easier to drive actions that improve customer acquisition, whereas the product mainly drives retention. But improving retention brings long-term gains and growth. Also, solid net revenue retention is an indication of product/market fit.
Reima Linnanvirta, Partnet at Trind
One approach is to focus on customer acquisition and retention. By building relationships with customers and providing high-quality products and services, startups can increase the likelihood of customers to continue doing business with them. Part of this strategy is identifying the ideal customers and building a perfect product for their needs. This can be especially important for startups operating in highly competitive markets.
Another strategy for improving net revenue retention is expanding the existing product. By adding new features, startups can upsell existing customers, add stickiness to their products, and broaden their customer base.
Finally, startups can optimize their pricing strategy to improve their net revenue retention rate. This might involve introducing new pricing tiers, offering discounts or promotions to encourage customer loyalty, or implementing other pricing strategies designed to increase the company’s revenue.
Conclusion
Net revenue retention is an important financial metric for startups, as it is a key indicator of the company’s growth potential and sustainability of the growth. By focusing on strategies such as customer retention, expanding product offerings, and optimizing pricing, startups can improve their net revenue retention rate and position themselves for long-term success.