Net Revenue Retention (NRR)vsMonthly Recurring Revenue (MRR)

NRR measures the percentage of recurring revenue retained from existing customers over a period, including upgrades, downgrades, and churn. An NRR above 100% means your existing customers are spending MORE over time even without new sales — your revenue grows automatically. NRR = (Starting MRR + Expansion − Contraction − Churn) ÷ Starting MRR × 100. Best-in-class SaaS companies have NRR of 120%+: Snowflake (158%), Datadog (130%), Twilio (127%). NRR is the single most predictive metric for long-term SaaS success — VCs have said it's the first metric they check.

MRR is the predictable, recurring revenue your business earns every month from subscriptions. It's the heartbeat of any SaaS company. MRR is broken into 5 components: New MRR (from new customers), Expansion MRR (upgrades), Reactivation MRR (returning customers), Contraction MRR (downgrades), and Churned MRR (cancellations). Net New MRR = New + Expansion + Reactivation − Contraction − Churn. ARR = MRR × 12. VCs use MRR growth rate as the primary metric to evaluate SaaS companies — a 15%+ month-over-month growth rate signals a company worth investing in.

The trap is confusing NRR with gross retention. Gross retention ignores expansion — it's just (Starting MRR − Contraction − Churn) ÷ Starting MRR. A company with 90% gross retention and 30% expansion has 120% NRR, which looks great. But if expansion revenues come from price increases (not increased usage), they're masking a retention problem. If you raise prices 20% but lose 10% of customers, NRR looks positive but you've damaged trust. Sustainable NRR comes from customers CHOOSING to spend more, not being forced to.

The trap is inflating MRR by including non-recurring revenue. Annual contracts should be divided by 12 (not counted as one month). One-time setup fees, professional services revenue, and implementation charges are NOT MRR. Including them makes your business look recurring when it's actually project-based. If your MRR chart has spikes instead of a smooth upward curve, you're probably counting non-recurring revenue.

Calculate NRR monthly: (Starting MRR + Expansion − Contraction − Churn) ÷ Starting MRR × 100. If NRR < 100%, your business is a leaky bucket — fix churn and build upsell paths before spending on acquisition. If NRR is 100-110%, focus on expansion revenue (usage-based pricing, premium tiers, cross-sells). If NRR > 120%, you have an exceptional business — invest aggressively in acquisition since each customer compounds in value.

Calculate Net New MRR every month using all 5 components: Net New MRR = New MRR + Expansion MRR + Reactivation MRR − Contraction MRR − Churned MRR. Track each component separately because they tell different stories. If Churned MRR is growing even while New MRR is growing faster, you have a leaky bucket that will catch up to you. The best SaaS companies have Net Revenue Retention > 120%, meaning Expansion MRR alone exceeds Churned + Contraction.