Ordway Study Highlights Differences in How SaaS Companies Report Net Revenue Retention
WASHINGTON – March 1st, 2024 – Ordway, the finance platform for innovative business models, today announced the results of a research study that analyzed how public SaaS companies define, calculate, and report on Net Revenue Retention (NRR) to investors. NRR is the most widely reported operating metric amongst publicly traded SaaS companies. It is also one of the most closely watched metrics as net retention rates correlate closely with company valuation.
- Net Revenue Retention – 67% (90 of the 135) reported on a net retention metric.
- Gross Revenue Retention – 5% (7 of the 135) reported on a gross metric.
- Both Net and Gross – 4% (97 of the 135) reported on both gross and net retention.
- Formulas – Eight different formulas for net revenue retention were disclosed. The most common approach taken is to divide the current period revenue by the base period revenue.
- Revenue Metric – Six different types of “recurring revenue” metrics were plugged into the formulas. GAAP revenue and ARR are the most common. ACV and billings are also used.
- Comparative Period—The most common approach is to compare ARR on the last day of the current and base periods. Others compare consecutive or corresponding months, quarters, and years.
- Smoothing Approaches—Almost one-third of companies use an averaging strategy to smooth out retention volatility. Either an arithmetic or weighted average is used for the prior 12 months.
- Pricing Models – Some include overage fees and variable revenue from usage-based pricing in their retention calculations while others do not.
- Professional Services – Some include long-term consulting engagements and premium customer support offerings while others do not.
- Contract Types – Some include monthly, pay-as-you-go plans, while others only include customer revenues on annual contracts.
- Firmographics – Some include all customers in the cohort used for retention measurement, while others exclude small businesses or accounts below certain revenue thresholds.
The different approaches to calculating retention metrics enable each SaaS company to present data that best aligns with the narrative they want to share about the company’s success in retaining and expanding the customer base. However, using so many different formulas, policy elections, and smoothing approaches limits the value of net revenue retention as a comparative metric to Wall Street analysts seeking to compare performance.
“Retention rates for public SaaS companies at a five-year low, down 10 points from the peak in 2021. Even the high performers that IPO’d in the 150s and 140s now are reporting rates that are 20 or 30 points lower As a result, almost every SaaS company is obsessing over how to boost their NRR,” said Steve Keifer, chief marketing officer at Ordway whose team led the research study. “It’s not just the upsells, cross-sells, and renewals that impact NRR, but also the way the calculations are performed. Half of the public companies we analyzed are using policy elections to adjust their retention reporting. .”
Ordway is a billing and revenue automation platform for today’s innovative, technology-centric business models. With Ordway, you can automate billing, revenue recognition, and SaaS KPIs for recurring revenue from subscriptions or usage-based pricing models. Using Ordway reduces your dependency on spreadsheets and manual processes, enabling you to run a leaner finance organization. But it’s not just about cost savings, Ordway generates more accurate billing and KPI reporting that your customers and investors will love.
The full 100-page research report can be downloaded from the Ordway website at: https://ordwaylabs.com/resources/research/how-public-companies-calculate-net-revenue-retention/
