1% in net retention could mean millions in MRR; shown thru colorful charts
There are plenty of blogs that explain what net retention analysis is and the formula to calculate it. This is a good one.
In this blog, I’m going to apply that math to a growing startup. You’ll see how a 1% delta in net retention could mean tens of millions in MRR for your startup. Let’s get started.
Startup: Alex’s Lemonade SaaS Stand 🍋
- Today is January 2021
- Currently at $83K MRR (or $1M ARR) 😊
- Growing 11% MoM for year 1, 2 🚀
- Grows 7% MoM for year 3, 4, 5 💥
What happens to MRR at different net retention rates?
Scenario #1. 80% / 90% / 100% / 110% / 120% net retention rate
😳 …the difference between 10% in net retention rate could be the difference between $163 million and $10 billion. This is what it looks like when we cap the y-axis at $20 million.
At 120% net retention rate, you go from $83K to $20M MRR in two years. Okay, obviously this never happens. No company has been able to maintain 120% net revenue retention every month for years. Even Slack took 3 years to reach $8M MRR / $100M ARR(don’t be confused, the chart below is in ARR).
Let’s look at another scenario, something less aggressive.
Scenario #2. 100% to 110% net retention rate; increments of 1%
100% net retention means you do not expand nor churn any dollars. Even a mere 1% improvement in net retention rate means $2M more MRR in 5 years. But it’s when revenue gets bigger that the difference in net retention makes a huge difference. Between 109% and 110% net retention, the difference is $46M in MRR.
Outcome: Alex’s Lemonade SaaS Stand 🍋
- Today is January 2021
- Currently at $83K MRR (or $1M ARR) 😊
- Growing 11% MoM for year 1, 2 🚀
- Grows 7% MoM for year 3, 4, 5 💥
- 100% net retention rate: $17M MRR in 2025 😎
- 105% net retention rate: $40M MRR in 2025 😤
- 110% net retention rate: $163M MRR in 2025 🦄
Qualitatively, we know that net revenue retention rate is the strongest indicator of product market fit. Now we see, quantitatively, what a big deal it is. Remember, when revenue numbers get bigger, net retention makes a huge difference. Happy retaining your customers!
Oh btw, we help startups with this by taking revenue operations out of Google Sheets and into Bluelight, where we track customer subscriptions and provide the strategic finance infrastructure for the CEO. Hit me up if we can help: alex@usebluelight.com
