For organizations that use a subscription-based pricing model, retention is a competitive advantage and a critical difference. Solving the issue of gross retention vs. net retention and using them might help you gain a better understanding of your success measures. So let’s find out what they are, how to calculate them, how to use them, and which one is better.
In this article:
- Gross Retention: What is it, and how does It work?
- What Is Net Retention, and how does it work?
- Three dimensions of the GRR vs. NRR Problem
- Which should you track: Net Retention vs Gross Retention?
- Increase your revenue by improving your retention
- Leaders in the industry
Gross Retention: What is it and how does It work?
This metric is sometimes known as gross revenue retention (GRR), which emphasizes that we’re talking about revenue retention rather than, at least explicitly, client retention. Of course, the two are interconnected in the sense that the more consumers you keep, the more revenue you get. However, we’re concentrating on revenue retention in this case. Isolating revenue retention in this way can give you insight into the impact customer retention plays on your revenue performance, as we’ll see later.
After you’ve deducted the effects of churn or downgrades to lower-priced products, but not the impact of upgrades, gross revenue retention evaluates how much of your monthly recurring revenue (MRR) you keep each month.
How to calculate?
Depending on your selling model and average subscription duration, gross revenue retention might be calculated monthly, quarterly, or annually.
This can be stated formally as a monthly formula:
GRR = [(MRR from renewals – MRR lost due to churn – MRR lost due to downgrades) / MRR at the beginning of the month] * 100
To use this formula,
- Divide your monthly recurring revenue from customers who renewed at the end of the month by your monthly recurring revenue at the beginning of the month.
- Subtract any revenue loss due to customers who stopped buying from you, switched to a lower-priced product, or in general is purchasing less from you.
- Multiply the result by your monthly recurring revenue at the beginning of the month. To convert the value to a percentage, multiply by 100.
Because even if you kept all accounts renewed without any churn or downgrades, you’d still have the same MRR at the end of the month as you did at the beginning, and GRR can never reach 100%. GRR can only go down from a maximum of 100%, not up. One distinction between gross and net retention is that the latter can exceed 100%.
You can easily change the above formula to compute gross retention for a different time period than a month. Instead of monthly figures, use figures for a quarter, a year, or any interval you want to track. The amount of time and the interval for the repeating dollar amount are the only two variables in the formula that needs to be updated.
When you only evaluate customers that either renewed with you, dropped their monthly spend with you, or discontinued buying from you, gross retention gives you a glimpse of how consistent your revenue is. However, it does not account for any income improvements from clients who boosted their average monthly spend with you by purchasing cross-sell or upsell items.
Isolating your recurring revenue without taking these growth variables into account is helpful since it reveals how well you’re doing at sustaining your revenue levels just by consolidating your current revenue base. This gives you a long-term estimate of how much money you may expect to generate without presuming that your clients will spend more with you.
Simultaneously, it calculates how much income you’re losing due to customer turnover or downgrades. If you’re facing a long-term danger of income loss, this can serve as an early warning indicator, allowing you to take preventative actions.
Gross Revenue Retention Rate might have a maximum value of 100 %. The median Gross Retention Rate (GRR) for all SaaS companies is 90%. A good Gross Retention Rate for SaaS providers selling to small and medium businesses (SMBs) is 80%. A good percentage is considered around 90% for Enterprise SaaS. Enterprise SaaS companies should set a target of 95% for very high Annual Contract Value (ACV) goods.
What is Net Retention and How Does it Work?
Also known as net revenue retention (NRR) is identical to gross retention, except we now consider how upsells and cross-sells counter revenue losses from attrition and downgrades. It’s worth noting that we’re discussing revenue retention rather than customer retention this time. However, net customer retention and net revenue retention can both be discussed, and the two variables impact one another. It’s worth noting that these two factors are nearly identical if you’re selling a single product or service. But for the time being, we’re concentrating on revenue retention.
How to Calculate?
The methodology for calculating net revenue retention is nearly identical to that of calculating gross revenue retention, with the exception that upsells and cross-sells must be factored in. For the sake of brevity, we’ll refer to these changes as “upgrades.” When this new variable is included, the GRR formula becomes NRR:
NRR = [(MRR from renewals + MRR from upgrades – MRR lost due to churn – MRR lost due to downgrades) / MRR at the beginning of the month] * 100
If you have a high renewal rate combined with substantial upgrades, minimal churn, and low downgrades, your NRR can reach 100%. This is what you should aim towards if you want to increase your revenue.
Net retention can be determined for periods other than a month by using numbers from the appropriate interval, just like gross retention. For example, gross retention can be calculated at monthly, quarterly, or yearly intervals.
A Net Revenue Retention Rate of >100% in a SaaS business is a growth indicator. The median Net Retention Rate for all SaaS organizations is 100%. Net Retention Rates are higher for items with a higher Annual Contract Value (ACV). A good Net Retention Rate for SaaS providers selling to small and medium businesses (SMBs) is 90%. A Net Retention Rate of 125% is regarded as good for Enterprise SaaS. Incorporating strategies like a merchant cash advance can further boost these rates and contribute to sustainable growth.
Three dimensions of the GRR vs. NRR Problem
In the net retention vs gross retention problem, there are a few key dimensions to consider:
- Financing: Are you a private company in need of additional funding? Investors may evaluate your GRR in this instance. Alternatively, are you already public or planning to become public? If that’s the case, you’ll very certainly be reporting NRR.
- Growth Rate: NRR may have a stronger economic impact in the short term if you are growing quickly and are valued on growth. On the other hand, slow-growing businesses might benefit greatly from GRR optimization (and therefore churn).
- Current Gross Retention: There is a bright line for GRR in general, and you don’t want to fall below it. This rate could be below 60% (for SMB) and below 70% (for enterprise), depending on your target client category and CAC (Customer Acquisition Cost) (for enterprise). Investors consider a corporation unviable if the churn rate falls below a specific threshold, and the churn rate implies more basic and systemic issues.
Which should you track: Gross Retention vs Net Retention?
People are often confused about ‘Net retention‘. So, which is more important to monitor: gross or net retention? The answer is that you require both since they provide critical information.
Without anticipating growth from upgrades, gross revenue informs you how stable your revenue is. This allows you to see how much churn and downgrades are costing you. If you establish a big revenue loss, you can take proactive measures to prevent downgrades, such as reaching out to clients at risk of churn or developing a customer success adoption plan.
Net revenue, on the other hand, allows you to concentrate on how quickly your revenue from upgrades is increasing. This might help you determine how effective you cross-sell, and upsell techniques are. If your analysis shows that you’re falling short in these areas, you can take actions to improve adoption and upgrade rates, such as designing a client expansion strategy.
Frederick Reichheld of Bain & Company (the inventor of the net promoter score) and Earl Sasser of Harvard Business School published an insightful HBR paper showing that increasing customer retention rates by 5% increases profits upto 95%.
Over the course of 18-24 months, focusing on customer retention can increase revenue by as much as 80%+, reduce customer acquisition costs by 30%+, and increase total customers by 1.5x.
Churn isn’t only a formula for calculating money amounts. It’s a crucial indicator that may be evaluated to provide you with a comprehensive view of your customers’ product journeys and successes. Churn indicators like Net Revenue Retention and Gross Revenue Retention can assist you in figuring out what’s not working in your company. This implies you may improve user journeys and revenue retention by plugging any gaps in your key product and support experiences.
Increase your Revenue by improving your Retention
When a behavior that raises your average customer value isn’t considered, gross retention tells you how much income you’re keeping. When revenue-increasing growth activity is part of the mix, net retention tells you how much revenue you’re keeping. For a complete view of how well your retention plan is performing, you’ll need both metrics.
Some other ways to increase your revenue are:
- To achieve optimal productivity and returns on investment, Revops or Revenue Ops connects and combines sales, marketing, and customer management holistically. This strategy will be implemented at all levels of the company.
- White Space Analysis is the process of collecting and analyzing a company’s data and sales records, then combining this with industry research and knowledge to find new revenue potential. If done effectively, White Space Analysis can help you increase your sales revenue and expand your firm.
Leaders making great strides
Now that we understand what is net retention vs gross retention, let’s look at what leaders in the industry are doing to ramp up results!
- Adam Toporek
Adam Toporek is a keynote speaker on customer experience who is known for his expertise in helping organizations reimagine customer care. He runs CTS Service Solutions, a customer experience firm that grew out of his blog, “Customers That Stick”.
In his book, “Be Your Customer’s Hero”, he mentioned: “Making customers happy doesn’t mean buying into the old adage, ‘The customer is always right.’ The customer is often preposterously and absurdly wrong. Move beyond a literal interpretation. Think about what the words signify: Place your customers first. Take good care of them at every turn.”
- Adrian Swinscoe
A customer experience consultant who specializes in customer service tactics that help businesses succeed. His expertise in customer-centricity, which bridges the gap between assistance and experience, is highlighted in his blog, keynote presentations, and workshops.
An excerpt from Adrian Swinscoe’s expert customer experience bible, How To Wow: “Many companies solicit feedback, but only a small percentage act on it. Even fewer take action as a result of the input, and even fewer really inform their customers about what they’ve done with it. As a result, many businesses overlook the importance of closing the feedback loop.”
- Annette Franz
The founder and CEO of CX Journey Inc, a worldwide recognized customer experience consulting organization specializes in developing revolutionary customer experience strategies. Annette co-hosts the #CXchat on Twitter, bringing together top customer experience thought leaders like herself to offer their thoughts, solutions, and ideas. She correctly emphasizes the importance of being employed and customer-centric at the same time.
She says in an interview with CMSWire: “What is necessary is to listen to your customers: understand their needs, expectations and jobs to be done, and design an experience that meets those needs. The same goes for your employees.”
- Blake Morgan
Blake Morgan is a futurist in the field of customer experience, a keynote speaker, and a two-time author. She has worked with leading companies and vendors such as Accenture, Ericsson, Adobe, and Verizon to provide customer experience leadership services.
She writes in her recent customer experience roundup blog: “Customer service and customer experience are often used interchangeably. While the two concepts are actually separate, service is a vital part of the overall customer experience. It’s no coincidence that brands with great customer service also tend to have a great customer experience.”
Final thoughts on Net Retention vs Gross Retention
Companies that rely on net figures are likely to overestimate their underlying business health since net results might obscurely churn signs. Revenue Retention Rate is a distinct metric from Renewal Rate; therefore, be sure to identify the two and track both. To gain the most clarity on your churn, look at both of these revenue retention formulas. This will provide you with a complete and balanced picture of your churn. It will also ensure that you have the data you require when looking for investors or applying for funding.
