How Public Companies Calculate Net Revenue Retention

SaaS Metrics

Comparative Reporting

One of the primary goals of net retention metrics is to enable investors to perform comparisons between different SaaS companies. Specifically, net retention metrics help investors understand which companies are able to expand their customer base over time by upselling more existing services and cross-selling new services.

Healthy SaaS businesses will be able to expand revenue from current accounts at a faster rate than they are losing revenue from churn, thus achieving a net retention metric of greater than 100%.

However, retention metrics lose their usefulness for comparability, when companies use different formulas and methodologies to calculate the numbers.

Most of the popular SaaS metrics (ARR, Rule of 40, CAC) have multiple different variations in use. ARR can be calculated using contracted MRR x 12 or by annualizing GAAP revenue. Rule of 40 can be calculated by summing ARR + FCF or GAAP revenue + EBITDA.

However, net retention metrics have far more permutations in use than any of the other SaaS KPIs. In 2019, Keybank published 110 different approaches that were in use by public SaaS companies to calculate retention metrics, which highlighted the divergence in approaches.

Goals of Research Study

In this research study, we sought to further quantify the problem by conducting a deeper analysis of the formulas used and policy elections made by over 170 different SaaS companies over the past 10 years.  In the report we categorized the different aspects of the formulas:

• Mathematical equation (e.g. (base + expansion – churn)/base)
• Recurring revenue metric (e.g. ARR, billings)
• Comparative period (e.g. YOY, corresponding quarter)
• Averaging techniques (e.g. weighted TTM average)

We’ve also quantified the number of companies using each different approach.  For example, we found that 47% of companies use ARR/MRR and 42% use GAAP revenues to calculate retention.

We also reviewed the qualitative disclosures from all of the SaaS companies to understand the types of pricing models (e.g. usage-based), product lines (e.g. professional services,), contract types (e.g. monthly plans), and customer segments (e.g. SMB) that are most commonly exclude from retention calculations.

We explored how public SaaS companies report on mergers and acquisitions, fluctuating foreign exchange rates, and changes to retention formulas to investors.