Net retention is the percentage of customers that continue to purchase from you after a given amount of time. This net number is essentially the net profit that you will generate from keeping your current customers versus looking for new ones. Net retention is important to track because it's much more profitable to keep your old customers than pay to acquire new ones.
There are four inputs that go into calculating net retention:
Using these inputs, you can calculate net retention with this formula:
Net retention percentage=((Monthly Recurring Revenue + Expansion Revenue - Revenue Reduction - Revenue Churn)/Monthly Recurring Revenue)*100
That sounds complicated, but let's use an example to make things clearer.
If you make $100 in monthly recurring revenue, gain $15 from subscription upgrades (expansion revenue), lose $5 in subscription downgrades (revenue reduction), and lose $30 in subscription cancellations, your net retention rate is (100+15-5-30)/100)*100=80%.
In plain English, this formula is really finding how well a company retains or grows its revenue from a certain customer base without needing to grow its customer base.
This net retention formula can be applied to any business model, but net retention is extremely important for SaaS companies. Companies like Dropbox or Evernote use a freemium model where they offer their product for free and only charge net new customers. For these types of companies, net retention can be used to figure out how effective your freemium business model is.
Net retention is critical for any business to look at long term profitability. Companies should always operate under the assumption that current customers are much more profitable than new ones. Net retention can help smart businesses make this assumption become a reality.
So how do you know if your company has great, good, or bad net retention?
While impressions are easy to calculate, it’s important to keep in mind that impressions are one of many valuable metrics to track your performance. If you don’t want to spend hours at the end of the month juggling numbers from your Google Analytics and Stripe accounts, consider trying Lido. Lido can help you build a dashboard to monitor your data and give a look into how your key metrics (such as impressions) change over time.
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