Gross Retention vs Net Retention
Gross retention vs net retention: Definitions and differences
Knowing which SaaS metrics to double down on can mean the difference between revenue growth and stagnation. As the SaaS market shifts towards efficient growth, customer retention, specifically measured through gross retention and net retention, is playing a pivotal role in securing growth and profitability for SaaS companies.
In this article, we will delve into the definitions and differences between gross retention and net retention, shedding light on their significance in the SaaS landscape. By grasping the nuances of these two metrics, SaaS founders and executives can learn how to leverage them to achieve predictable, efficient revenue growth.
What is gross revenue retention (GRR)?
Gross Revenue Retention (GRR) is a fundamental metric that measures the amount of monthly recurring revenue (MRR) a SaaS business retains each month after accounting for customer churn or downgrades to lower-priced products. It provides insights into the overall revenue stability within the existing customer base, excluding any revenue generated from expansion or upselling efforts.
At its core, GRR captures the effectiveness of a SaaS company's efforts in retaining its existing customers and preventing revenue leakage due to churn or downgrades. By monitoring GRR, SaaS businesses gain a clear understanding of their ability to maintain a consistent revenue stream from their customer base over time.
How to calculate GRR
To calculate GRR, start with the total MRR at the beginning of a specific period (month, quarter, or year). Then, subtract the MRR lost due to churn or downgrades during that same period. The resulting figure represents the retained revenue, providing a snapshot of the overall revenue retention rate.
GRR = (Churn MRR + Downgrade MRR) / Starting MRR
What does this calculation look like in action? Here’s a real-world use case to tie it all together:
Let's consider a hypothetical SaaS company called "CloudWare," which provides cloud-based project management software. CloudWare has been experiencing a steady increase in customer churn over the past few months and wants to understand the impact on its revenue stability. To address this challenge, the company decides to calculate and reference its Gross Revenue Retention (GRR) rate.
CloudWare's finance team gathers the necessary data for the calculation. They begin with the total Monthly Recurring Revenue (MRR) at the beginning of the current quarter, which amounts to $500,000. After analyzing the customer data, they discover that during the same period, the company lost $50,000 in MRR due to customer churn and downgrades to lower-priced plans.
To calculate the GRR, the finance team subtracts the lost MRR from the initial MRR:
GRR = (Initial MRR - Lost MRR) / Initial MRR
In this case, the calculation would be:
GRR = ($500,000 - $50,000) / $500,000 = 0.9 or 90%
Interpreting the GRR result, CloudWare realizes that it has achieved a GRR rate of 90% for the quarter. This means that it retained 90% of its original MRR after accounting for customer churn and downgrades.
Why you should track your gross revenue retention rate
Tracking and measuring your Gross Revenue Retention (GRR) rate is a vital practice if you want to achieve sustainable growth and maximize profitability.
This metric provides a comprehensive view of a company's ability to retain customers, assesses revenue stability, and uncovers potential areas for improvement. Here’s why tracking GRR is crucial for your business.
Evaluate Customer Retention Success:
The GRR rate serves as a reliable indicator of how successful a SaaS business is at retaining its existing customers. By measuring the retention of Monthly Recurring Revenue (MRR), GRR offers insights into the company's ability to maintain a consistent revenue stream from its customer base over time. A high GRR rate signifies that the business is effectively mitigating customer churn and minimizing revenue loss.
Measure Existing MRR Performance:
GRR provides a comprehensive perspective on the performance of existing MRR. It takes into account not only the revenue generated from new customers but also the revenue retained from current customers. By tracking GRR, you can assess the stability and predictability of your revenue stream, allowing for more accurate financial planning and forecasting.
Identify Churn and Downgrade Patterns:
GRR enables businesses to identify and understand customer churn and downgrades. By analyzing the lost MRR component of the calculation, you gain visibility into the extent to which customer attrition or downgrades impact your revenue. This insight empowers you to take proactive measures to address churn and minimize the negative financial impact on your business.
Uncover Areas for Improvement:
Tracking the GRR rate not only reveals the overall success of customer retention efforts but also highlights areas for improvement. If the GRR rate is lower than desired or declining over time, it indicates the need to review retention strategies, optimize customer experiences, and identify opportunities for enhancing customer satisfaction and loyalty.
What is net revenue retention (NRR)?
Net Revenue Retention (NRR), also known as Net Dollar Retention (NDR), is a key SaaS metric that measures the percentage of revenue a SaaS business retains from existing customers within a specific time frame. Unlike Gross Revenue Retention (GRR), which solely focuses on retained revenue after accounting for churn and downgrades, NRR includes the impact of expansion revenue generated from upselling, cross-selling, and upgrades.
NRR provides insights into the overall revenue performance of a SaaS company's existing customer base, considering both revenue retained and revenue gained from expansion efforts. It serves as a comprehensive measure of revenue stability, growth potential, and customer success.
How to calculate NRR
To calculate NRR, begin with the MRR from the existing customer base at the beginning of a specific period. Then, account for any revenue churned or downgraded during that period, as well as the additional revenue generated from expansions. The resulting figure is the net retained revenue.
The NRR calculation can be expressed as follows:
NRR = (MRR at the end of the period - Revenue churned or downgraded + Expansion revenue) / MRR at the beginning of the period
Interpreting NRR, a value greater than 100% indicates revenue expansion and growth from existing customers. On the other hand, a value below 100% suggests revenue contraction or a decrease in revenue from existing customers.
What does this calculation look like in action? Here’s a real-world use case to tie it all together:
Let's consider a hypothetical SaaS company called "TechStack," which provides a comprehensive suite of software tools for digital marketing. TechStack has been facing challenges in increasing its revenue and wants to leverage its existing customer base to drive growth. To address this, the company decides to calculate and reference its Net Revenue Retention (NRR) rate.
TechStack's finance team begins the calculation by gathering the necessary data for a specific quarter. They determine that at the beginning of the quarter, the company had an MRR of $1,000,000 from its existing customer base. Throughout the quarter, TechStack experienced churn and downgrades that resulted in $100,000 of lost revenue. However, through upselling and cross-selling efforts, the company generated an additional $150,000 in expansion revenue from existing customers.
To calculate NRR, the finance team incorporates these figures into the formula:
NRR = (MRR at the end of the quarter - Revenue churned or downgraded + Expansion revenue) / MRR at the beginning of the quarter
Using the provided data, the NRR calculation would be:
NRR = ($1,000,000 - $100,000 + $150,000) / $1,000,000 = 1.05 or 105%
Interpreting the NRR result, TechStack realizes that it has achieved an NRR rate of 105% for the quarter. This signifies that the company not only retained 100% of its existing MRR but also achieved a 5% expansion in revenue from its customer base through upselling and cross-selling efforts.
Why you should track your net revenue retention rate
By monitoring and analyzing NRR, businesses can assess customer loyalty, retention, expansion opportunities, and enhance their revenue predictability. Let's explore why tracking the NRR rate is essential for your company's success.
Assess Customer Loyalty and Subscription Continuity
Tracking NRR allows you to gauge how effectively your SaaS company retains its existing customers. It provides insights into the percentage of revenue retained from your customer base, considering factors such as churn, downgrades, and expansions. By understanding how many customers continue their subscriptions versus those who downgrade or cancel, you can evaluate customer loyalty and identify potential areas for improvement.
Identify Expansion and Upsell Opportunities
NRR enables you to uncover expansion and upsell opportunities within your existing customer base. By analyzing the expansion revenue component of the NRR calculation, you gain visibility into the additional revenue generated from customers who upgrade their plans, add new features, or purchase additional products. This knowledge empowers your sales and account management teams to identify high-value customers and tailor strategies to maximize revenue from these accounts.
Enhance Revenue Predictability
Tracking NRR helps make your company's growth rate more predictable. By understanding the revenue retained from existing customers and the revenue lost due to churn or downgrades, you gain insights into the stability and predictability of your recurring revenue stream. This knowledge enables you to forecast revenue more accurately, make informed financial decisions, and set realistic growth targets.
Optimize Customer Success and Retention Strategies
NRR serves as a valuable metric for evaluating the effectiveness of your customer success and retention strategies. By tracking NRR over time, you can identify trends, patterns, and fluctuations in customer behavior. If the NRR rate is declining, it indicates the need to review and refine your customer success initiatives, improve product offerings, enhance customer support, or invest in strategies that increase customer satisfaction and loyalty.
Gross retention vs net retention: Core differences
While both Gross Revenue Retention (GRR) and Net Revenue Retention (NRR) provide valuable insights into customer retention and revenue stability, there are distinct differences between these metrics. Let's dive into the core dissimilarities between GRR and NRR and understand their implications for SaaS companies.
Definition and Measurement
Gross Revenue Retention (GRR) measures the percentage of recurring revenue retained from the existing customer base over a given period. It takes into account revenue lost due to churn, downgrades, and pricing changes. GRR solely focuses on retained revenue without considering any additional revenue generated from expansions, such as upgrades, upsells, or cross-sells.
On the other hand, Net Revenue Retention (NRR) reflects the percentage of revenue retained from the existing customer base over a specific period, accounting for both revenues lost and gained from expansions. NRR includes the impact of upsells, cross-sells, upgrades, and pricing changes in addition to churn and downgrades.
Assessment of Revenue Stability
GRR primarily assesses revenue stability by measuring the retention of recurring revenue from the customer base. It highlights the effectiveness of customer retention efforts and the ability to maintain a consistent revenue stream. GRR helps SaaS companies understand the proportion of revenue retained despite churn or downgrades, providing insights into the stability of their customer base.
In contrast, NRR goes beyond revenue stability to evaluate the overall revenue performance and growth potential within the existing customer base. It considers not only the retained revenue but also the revenue generated from expansion efforts. By including upsells, cross-sells, and upgrades, NRR reveals the true revenue potential and the success of expansion strategies.
Focus on Expansion Opportunities
One of the key distinctions between GRR and NRR lies in their treatment of expansion revenue. GRR does not account for any expansion revenue, focusing solely on the revenue retained from existing customers. This means that GRR might not capture the impact of successful upsells, cross-sells, or upgrades on overall revenue performance.
In contrast, NRR considers the revenue gained from expansion activities, providing insights into the growth potential within the customer base. By including expansion revenue, NRR highlights the effectiveness of upselling and cross-selling strategies, enabling companies to identify growth opportunities and optimize revenue generation from existing customers.
How to increase GRR
By improving GRR, businesses can enhance customer retention rates, increase revenue stability, and drive long-term growth. Let's explore some actionable tips to increase GRR and achieve sustainable success.
Implement thorough user onboarding
Properly onboarding users is essential for setting the foundation of a strong customer relationship. By implementing a comprehensive user onboarding process, including tutorials, guided tours, and educational resources, you empower customers to understand and utilize your platform effectively. Additionally, offering check-ins from a dedicated customer success team provides personalized assistance and ensures users are maximizing the value of your product.
How it helps increase GRR:
Thorough user onboarding reduces the likelihood of early churn and increases customer satisfaction. When users have a clear understanding of how to use your platform and experience a smooth transition into their workflows, they are more likely to continue their subscriptions and engage with your product. Improved user onboarding leads to higher GRR by reducing the risk of customers abandoning your solution due to a lack of knowledge or understanding.
Identify and fix users' pain points
Understanding and addressing users' pain points is crucial for fostering a positive customer experience and driving retention. Regularly reviewing user behavior, analyzing support tickets, monitoring product forums, and engaging with social media posts can provide valuable insights into the challenges customers face while using your product. By identifying pain points and proactively addressing them, you demonstrate your commitment to customer success.
Offer a self-service knowledge base
A self-service knowledge base provides customers with easy access to relevant information, tutorials, FAQs, and troubleshooting guides. By creating a comprehensive knowledge base, you empower customers to find answers to their questions and resolve issues independently. This reduces their reliance on customer support and ensures a seamless experience whenever they encounter challenges.
How to increase NRR
Improving NRR not only strengthens customer retention but also drives additional revenue through upsells and upgrades. Let's explore some effective strategies to increase NRR and foster sustainable growth for your SaaS business.
Help users make the most of your platform
Identify customers who may not be fully utilizing all the features and capabilities of your platform. By proactively reaching out to these customers and providing personalized guidance and training, you can help them unlock the full value and potential of your product.
Offer upgrade/upsell opportunities
Identify customers who have outgrown their current subscription level or who could benefit from additional features or higher-tier plans. Proactively present them with the upgrade or upsell opportunities, showcasing the added value and benefits they can gain by moving to a higher subscription or contract.
Use Net Promoter Scores (NPS) to identify detractors
Leverage the Net Promoter Score (NPS) survey to identify customers who may be at risk of churning or becoming detractors. NPS provides valuable insights into customer sentiment and loyalty, enabling you to detect potential churn signals at an early stage.
Driving growth through customer retention
While tracking and optimizing retention metrics is vital, it is equally important to have a comprehensive understanding of the overall financial health of your business. Tracking key financial metrics and KPIs empowers CFOs and financial leaders to make strategic decisions that enhance growth and profitability.
This is exactly why we built Maxio, a leading financial operations platform designed to give SaaS leaders total visibility over their key metrics, including GRR, NRR, and other vital KPIs.
If you're a financial leader looking to take control of your company's financial metrics and drive growth and profitability, schedule a demo to learn how Maxio can help.