What Is NRR in SaaS and How to Improve It Before a Sale
Net revenue retention has become the metric that matters most. Investors and acquirers now treat NRR as the single most reliable indicator of SaaS business quality, valuing it above growth rate, above gross margin, and often above absolute revenue. A business with strong NRR can command premium valuations; one with weak retention struggles regardless of other strengths.
For founders preparing for a transaction, understanding NRR, measuring it accurately, and improving it deliberately represent some of the highest-leverage activities available. The work you do on retention in the 12 to 24 months before a sale will directly affect your outcome.
Understanding the Metric
Net revenue retention measures how much revenue you retain and grow from your existing customer base over time. The formula captures the combined effect of renewals, expansion, churn, and contraction:
NRR = (Starting ARR + Expansion - Churn - Contraction) / Starting ARR
An NRR of 100% means you retained exactly what you started with. No net growth from existing customers, but no shrinkage either. Above 100% means your existing customer base is growing even without new customer acquisition. Below 100% means you are losing revenue from existing customers faster than you can expand within them.
The power of NRR above 100% compounds dramatically. A business with 110% NRR grows its existing customer base by 10% annually without acquiring a single new customer. Over five years, that base roughly doubles through expansion alone. New customer acquisition then builds on an already-growing foundation rather than merely replacing churn.
Why Acquirers Obsess Over NRR
Acquirers focus on NRR because it reveals business quality that other metrics obscure.
Growth rate tells you how fast the business is expanding but not why. A company growing at 50% through aggressive customer acquisition while churning 30% annually faces fundamentally different economics than one growing at 50% with 10% churn. The first is filling a leaky bucket; the second is building compounding value.
McKinsey's analysis of more than 100 B2B SaaS companies found that efficient growth is most correlated with value creation. Companies in the top quartile of valuation multiples, with a median enterprise-value-to-revenue multiple of 24x compared with 5x for bottom-quartile peers, showed better performance on core metrics of efficient growth, particularly net revenue retention.
The data is striking. Top-quartile-valued B2B SaaS companies achieve NRR rates of 113%, meaning they grow 13% annually without adding any new business. Bottom-quartile peers reached only 98% NRR. That 15 percentage point gap in retention corresponds to nearly a fivefold gap in valuation multiples.
McKinsey's further analysis of 55 B2B SaaS companies shows that top-quartile NRR players sustain higher valuations than peers through both bull and bear markets. When markets correct, high-retention businesses hold value better than high-growth but leaky ones.
Current Benchmarks
Understanding where your NRR falls relative to benchmarks helps you assess your position and identify improvement potential.
SaaS Capital's 2025 research on bootstrapped companies with $3M to $20M ARR shows a median NRR of 104%, with 90th percentile performers reaching 118%. These figures represent scale-stage businesses that have achieved product-market fit without external capital.
Venture-backed companies at similar stages often report higher numbers, but the comparison is imperfect. Businesses optimising for growth with investor capital may sacrifice retention quality for faster expansion. The sustainable NRR of bootstrapped companies often provides a better comparison for lower middle market transaction targets.
Company size affects benchmarks significantly. Larger companies, typically those above $100M ARR, report median NRR around 115%. Smaller companies in the $1M to $10M ARR range hover near 98%. Part of this gap reflects the operational sophistication that comes with scale; part reflects survivor bias in which companies grow large.
The Components of NRR
Improving NRR requires understanding its components and addressing each deliberately.
Gross Revenue Retention
Gross revenue retention, or GRR, measures what you keep from your existing base before counting expansion. The formula considers only churn and contraction:
GRR = (Starting ARR - Churn - Contraction) / Starting ARR
GRR caps at 100%. You cannot retain more than you had. Current benchmarks show median GRR around 92% for scale-stage bootstrapped companies, with top performers reaching 98%.
GRR represents the foundation on which expansion builds. A business with 85% GRR needs 15% expansion just to break even on its existing base. One with 95% GRR needs only 5% expansion to achieve net growth. The compounding mathematics favour high retention dramatically.
Expansion Revenue
Expansion comes from selling more to existing customers: upgrades to higher tiers, additional seats or usage, cross-sell of new products, and price increases on renewals. Each source has different characteristics.
Usage-based expansion happens automatically when customers consume more of your product. This model produces reliable expansion when customers derive ongoing value but requires pricing structures that capture that value.
Seat-based expansion occurs as customer organisations grow. If you price per user and your customers add headcount, expansion follows naturally.
Cross-sell and upsell require active sales motion. Customer success teams identify expansion opportunities, sales teams execute them. This expansion is less automatic but often higher margin.
Price increases on renewal represent underutilised expansion potential for many businesses. Customers who renew without price increase represent value left on the table if your product has genuinely improved or market rates have risen.
Improving NRR Before a Sale
For founders with 12 to 24 months before an anticipated transaction, several strategies can meaningfully improve NRR.
Reduce Churn
Churn reduction typically offers the highest-leverage improvement opportunities. Every dollar of prevented churn contributes directly to both GRR and NRR.
Start by understanding why customers leave. Exit interviews, churn analysis by cohort and customer profile, and pattern recognition in usage data before cancellation all provide insight. Common causes include poor onboarding, insufficient value realisation, changing customer needs, competitive displacement, and price sensitivity.
Address the causes you can control. Improve onboarding to accelerate time to value. Invest in customer success to ensure ongoing value delivery. Fix product gaps that drive competitive losses. Review pricing for segments showing price-driven churn.
McKinsey's research found that companies offering the most sophisticated value realisation and adoption journeys produce NRR around seven percentage points higher than peers with basic practices. Investing in customer success is not merely cost; it is revenue protection and expansion enablement.
Accelerate Expansion
With retention stabilised, focus shifts to expansion. Several approaches accelerate expansion revenue.
Product expansion creates new things to sell. Additional modules, premium features, and complementary capabilities all represent expansion opportunities. The key is ensuring new offerings deliver genuine value rather than merely creating billing events.
Pricing structure affects expansion potential. Usage-based components capture value as customers grow. Tiered pricing creates natural upgrade paths. Seat-based models expand automatically with customer headcount.
Customer success motion matters. McKinsey found that companies with best-in-class pricing and packaging practices experienced roughly 16 percentage points higher NRR compared with peers having basic practices. Sophisticated pricing and packaging create expansion paths that customers navigate naturally.
Segment Your Approach
Not all customers warrant identical investment. High-value customers with expansion potential deserve dedicated customer success attention. Lower-value customers may receive scaled, technology-enabled support.
Identify your highest-potential accounts and invest disproportionately in their success. These customers drive the expansion that moves NRR. Spreading resources evenly across all customers dilutes impact where it matters most.
Measure and Track Relentlessly
You cannot improve what you do not measure. Establish clear NRR reporting, disaggregate the components, and track trends over time.
McKinsey's research emphasises that best-in-class companies have detailed understanding of granular NRR drivers specific to their customers. Near-real-time dashboards allow them to drill into microsegments and understand how specific actions affect retention and expansion.
Less than 20% of companies surveyed had best-in-class practices for NRR reporting and performance management, suggesting significant opportunity for prepared sellers to differentiate through measurement sophistication.
The Acquirer's Lens
Acquirers examining NRR look beyond the headline number. They want to understand the components, trajectory, and sustainability of your retention performance.
Component analysis reveals whether NRR comes from low churn, strong expansion, or both. Expansion-driven NRR can mask underlying churn problems that will emerge if expansion slows. Retention-driven NRR with modest expansion may indicate untapped potential.
Trajectory matters as much as absolute level. Improving NRR from 95% to 105% over two years tells a different story than declining from 115% to 105%. Acquirers model forward, not backward.
Sustainability questions address whether current performance will continue under new ownership. Expansion driven by price increases may face customer pushback. Retention dependent on founder relationships may deteriorate post-close. Acquirers probe for durability.
Positioning Your NRR Story
When presenting your business to acquirers, frame your NRR thoughtfully.
If NRR is strong, emphasise it prominently. Lead with the metric, show the components, demonstrate trajectory, and connect retention to customer value delivery. Strong NRR is among the most compelling evidence of business quality.
If NRR has improved, tell the improvement story. What was broken, what you fixed, and how results changed demonstrates operational capability. Acquirers value founders who identify problems and solve them.
If NRR is weak but improving, acknowledge the gap while demonstrating progress. A business at 95% NRR trending toward 105% over six months presents better than one at 100% but flat. Trajectory often matters more than current state.
If NRR is weak without clear trajectory, address the issue directly. Identify the causes, present your plan, and be realistic about timeline. Attempting to obscure weak retention never works; sophisticated acquirers will find it during diligence.
The Return on Retention Investment
Improving NRR is among the highest-return investments available to founders approaching a transaction. A ten percentage point improvement in NRR can translate to meaningful multiple expansion, driving valuation increases that dwarf the cost of customer success investment.
The work compounds. Retention improvements accumulate in your customer base. Expansion capabilities developed now generate revenue through closing and beyond. The business you build to improve NRR is the business acquirers want to own.
If you are preparing for a transaction and want to discuss how retention metrics affect your positioning, we welcome the conversation.