[Template Included] Calculate + Improve Gross & Net Revenue Retention

[Template Included] Calculate + Improve Gross & Net Revenue Retention
Jake-Ballinger

Jake Ballinger

Cube Writer

Updated March 2022

📖 minutes

[Template Included] Calculate + Improve Gross & Net Revenue Retention

The best businesses retain customers and grow them over time.

In this article, you’ll learn about two metrics that measure customer retention and growth: gross revenue retention and net revenue retention.

You'll learn when to use them, how to calculate them, and how to improve them.

Keep reading.

Key Takeaways

  • Gross Revenue Retention (GRR) measures the revenue a business keeps over a time period. It accounts for contractions and losses, but not expansions.
  • Net Revenue Retention (NRR) measures the revenue from existing customers over a time period. It includes expansions as well as contractions and losses.
  • Creating a positive customer success experience is a proven way to maximize both forms of revenue retention.

Contents

  1. What is Revenue Retention?
  2. What is Gross Revenue Retention?
  3. What is Net Revenue Retention?
  4. What Don't Gross Revenue Retention and Net Revenue Retention Tell Us?
  5. Which Should I Measure and When Should I Use Them?
  6. How to Improve Gross and Net Revenue Retention

What is Revenue Retention?

Revenue retention is a measure of how much revenue a business keeps from the same customer base, compared over a time period. You can track it by month, quarter, year, week, or even day.

Revenue retention only refers to existing customers. New customers are great, but revenue retention considers only current customers.

Benefits of tracking revenue retention

Acquiring a new customer can be 5 to 25 times more expensive than retaining an existing one. It's not a stretch to say a similar trend holds for revenue.

It is, perhaps obviously, less expensive (in terms of time, resources, and finances) to retain the revenue you've already generated.

Revenue retention is a good measure of sustainability and profitability. A business growing quickly but churning most of its customers reflects deeper issues in the business. In contrast, a business renewing and growing its customer base has a greater potential lifetime value of its customers and is more profitable in the long run.

Reliable revenue retention stabilizes the runway. This is more important for small companies, where churn can vary.

Knowing your revenue retention is essential for scenario planningKnowing the story of the past is essential to accurately predicting the future. 

Now, you might be wondering why not just track customer retention?

Why not just track Customer Retention?

(Note that many companies refer to customer retention as "logo retention")

Not all customers are created equal. One customer can constitute 30% of a company’s revenue and another just 0.05%. Losing any customer hurts, but one hurts a lot more if it reflects a greater share of revenue.  

Tracking revenue retention alongside customer retention can help you get the full picture.

There are two primary ways to track revenue retention: gross revenue retention (GRR) and net revenue retention (NRR). Let’s look at each.

What is Gross Revenue Retention? 

Gross revenue retention refers to a business's ability to retain revenue. It’s strictly the percentage of revenue they've retained from the start of the period.

In other words: how successful is this business in retaining its existing customers (at their existing price points / contract values)?

Here's how to calculate gross revenue retention:

GRR = (MRR - Churn - Contractions) / MRR

Where MRR(Start) is monthly recurring revenue at the start of the month, churn refers to the dollar amount lost to customers who are no longer customers, and contractions refers to the dollar amount lost to customers who downgrade to a less expensive plan.

How to Calculate Gross Revenue Retention: An Example

Assume the following:

  • Begin the month with $100,000 in monthly recurring revenue (MRR)
  • Gain $10,000 in new sales
  • Sign $10,000 in upgrades from existing customers (expansions)
  • Lose $5,000 in customer churn
  • Lose $5,000 due to downgrades (contractions)

We’ve earned $10,000 this month in upgrades. We’ve also lost $10,000 in churn. So our overall revenue retention equals out, right? Money in ($10k) equals money out ($5k + $5k = $10k).

Not so fast.

Fortunately, there's more than one way to cook an egg. One of those is gross revenue retention (GRR).

Let’s calculate it:

GRR = ($100,000 - $5,000 - $5,000/$100,000)
GRR = $90,000/$100,000
GRR = 0.9
GRR = 90%

So our Gross Revenue Retention is actually 90%, since we lost 10% of our revenue to churn.

Additionally, we made $10k in new sales. But since those are new acquisitions, we ignore them.

What does this mean, though?

What does Gross Revenue Retention Tell Me?

GRR is a stability indicator: it signals how reliable the business's income is and how pleased current customers are. (If they were unhappy, they'd churn.)

What is a good GRR?

The closer GRR is to 100%, the better.

That said, this depends on the customer size. Higher churn (and therefore lower retention numbers) is more expected from SMBs.

Why is Gross Revenue Retention important to track?

Gross revenue retention tells you how stable (and predictable) the business's revenue is without assuming growth from upsells or upgrades.

If gross revenue retention is low, it could signal a few problems with the business's health:

  • Not solving the right problem. People don't stick around because you’re not solving a big enough problem for them to continue to pay for the solution.
  • The experience is frustrating. Bad customer experiences with the product or services can lead to churn.
  • Customers don't use the product enough. If people only log in once a month, you’re not building trust or loyalty with them.

But our gross revenue retention doesn’t account for new customers or expansions. It only looks at what we started with and how much we’ve lost.

What is Net Revenue Retention?

Net revenue retention (also known as “Net Dollar Retention” or NDR)  is the total (net) change in recurring revenue. It tracks both a business's ability to retain and acquire revenue from a group of customers.

Most SaaS customer success teams use NRR to measure their own performance, too.

The following revenue-impacting things can happen:

  1. A customer leaves ("churns")
  2. A customer downgrades to a lower-paying plan
  3. A customer buys a new product (from you)
  4. A customer upgrades to a higher-paying plan

Fortunately, the net revenue retention formula takes all of this into account:

NRR = (MRR(Start) + Expansions - Churn - Contractions) / MRR(Start)

MRR(Start) is monthly recurring revenue at the start of the month, expansions are the new money existing customers have spent with the business, churn refers to the dollar amount lost to customers who are no longer customers, and contractions refers to the dollar amount lost to customers who downgrade to a less expensive plan.

How to Calculate Net Revenue Retention: An Example

Let’s revisit our earlier example:

  • MRR = $100,000
  • New Sales = +$10,000
  • Expansions = +$10,000
  • Churn = -$5,000
  • Contractions = -$5,000

Even though net revenue retention is a growth metric, it's still a retention metric. Don't make the mistake of including new sales.

Plugged into the formula, it looks like this:

NRR = ($100,000 + $10,000 - $5,000 - $5,000) / $100,000
NRR = $100,000/$100,000
NRR = 1
NRR = 100%

Since money in equals money out, our net revenue retention is 100%. We started the month with a $100,000 MRR and we exited the month with a $100,000 MRR.

What does Net Revenue Retention tell me?

NRR (or also called NDR) can help business owners and stakeholders gauge how the business is expanding. It's a growth indicator: it signals how well cross-sell and upsell strategies are working.

  • NRR > 100% indicates growth.
  • NRR = 100% means the business is static.
  • NRR < 100% indicates decline.

According to advisor Dave Kellogg, a good median NRR for private companies is 104%.

It's worth repeating that NRR only looks at existing customers. It's best to combine it with other metrics to get a full picture of what's happening in the business.

Why is Net Revenue Retention important to track?

A high net revenue retention means customers are climbing the value ladder. You're offering the right things they need as they grow.

This means: keep doing what you're doing.

If net revenue retention is low, it could signal a couple of things about the business's health:

  • Not offering the right upgrades. People get a basic plan and find it fits their needs perfectly, so there's no need to upgrade.
  • The customer success experience is frustrating. It's possible that people could upgrade, but the experience of working with the product or company is more trouble than it's worth. So they look somewhere else.
  • Need to build brand loyalty. Also called customer loyalty, this is an abstract measure of how much people will choose your brand over others. When we're loyal, we don't switch brands.

A consistently low net revenue retention rate should sound alarm bells.

What don’t Gross Revenue Retention and Net Revenue Retention tell us?

Gross revenue retention is a strict measure of the value we’ve retained from our existing customers, but it doesn’t account for any growth.

Net revenue retention is a more complete picture of the revenue we've retained from our existing customers, but it hides what’s really going on in the business because it can obscure and cloak a churn problem.

But the biggest thing these metrics don't tell us is what's going on with our customers. Because these are revenue metrics, it's best to support them with customer churn metrics to get the full picture of what's happening in the business.

Which Should I Measure and When Should I Use Them?

Measure both! In fact, the best insights come from cross-referencing them.

 

High NRR

Low NRR

High GRR

✅ Keep up the great work!

Churn is low, but growth is poor.

Low GRR

(Unlikely to happen. Check your calculations.) 

🚨 There are larger underlying issue(s)

High GRR and High NRR: Everything is good. It's time to focus on acquiring new customers now.

High GRR but Low NRR: This business should look at the upgrades they're offering. They're doing a great job at keeping their customers, but they need to get good at selling to them again.

Low NRR and Low GRR: Trouble. This business needs to radically invest in customer support and take a hard look at the problem they solve.

How to Improve Gross and Net Revenue Retention

At the end of the day, people are the ones who make the decision to churn or not.

So while we might calculate revenue retention metrics separately from customer churn, in practical terms there's no separating them.

But there are a few nuances.

How to Improve Gross Revenue Retention

Since gross revenue retention focuses on avoiding churn and contractions, the best strategies to improve it focus on keeping your customers involved and happy.

How to Improve Net Revenue Retention

Much of what you do to improve GRR will indirectly improve NRR because it reduces churn and contractions. If you want to double down on improving your NRR, focus on expansions. Or course, following a customer retention strategy helps, too. 

  • Provide better customer service: An American Express report says that 66% of customers are willing to spend more with a company that prioritizes customer success.
  • Refine the value ladder: Net Revenue Retention increases as customers move to the next tier in their subscriptions. This means the next pricing bracket should meaningfully add value.
  • Adopt a customer expansion strategy: This will help increase the customer lifetime value (CLV) and increase net revenue retention.

Dig deeper with cohort analysis.

A cohort is a subsection of customers who share a characteristic (they’re SMBs, they’re located in Asia, or they’ve been customers for fewer than 3 months).

Cohort analysis is the analysis of a specific cohort's behaviors.

...How does this help address problems with GRR and NRR?

It might be that a single cohort is responsible for 80% of a business's churn.

So to improve GRR and NRR, that business needs to work at retaining customers or logos in that cohort.

For example, if you have a lot of customers in a specific time zone who are churning because you don't have any customer support representatives covering that area, it makes sense to hire a customer service representative (or a few!) to cover that time zone.

Now It's Your Turn

Now you know the difference between gross revenue retention and net revenue retention.

You also learned how to calculate them, what they mean, and how to improve each.

Now I want to turn it over to you: which strategy in this article are you going to try first?

Are you going to improve your customer support experience? Or maybe you're going to revisit your value ladder.

Share this on LinkedIn and tag us to keep the conversation going. 

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