TL;DR
- Gross revenue retention (GRR) is a measure of your ability to maintain existing revenue streams and manage customer churn effectively.
- Net revenue retention (NRR) provides insights into your company's growth by accounting for both customer losses and gains through upselling.
- Both GRR and NRR are crucial for understanding different aspects of your business's financial health, with GRR focusing on customer retention and NRR on growth potential.
- By analyzing these metrics, you can better strategize on customer retention and expansion, ensuring a balanced approach to achieving sustainable growth.
- A high revenue retention rate signals successful repeat business and the ability to replace lost customers, crucial for investor confidence.
- Togai offers tools to quickly adapt pricing strategies to your business needs, facilitating faster market entry and revenue optimization.
Understanding the financial health of a business is crucial for its success, regardless of the industry. Employing the right metrics allows organizations to assess their current financial position and make informed predictions about future growth. These insights enable businesses to develop effective strategies to achieve their desired expansion.
While companies that offer physical products often focus on metrics like total revenue and overhead costs, Software as a Service (SaaS) and tech-enabled companies emphasize different key performance indicators (KPIs). These metrics, such as revenue and churn, provide valuable insights into the future trajectory of the company.
In this article, we will explore two essential calculations that can be used to measure churn through revenue retention in your business. Both of these calculations are crucial for obtaining unique information about growth and profitability. Gaining a clear understanding of the distinctions between these metrics will help you delve deeper into your SaaS business and drive customer retention.
Understanding the Meaning of Revenue Retention
Revenue retention refers to the revenue generated from existing customers in the previous month or year. It is important to note that the revenue retention rate is not necessarily the same as the customer retention rate.
SaaS and tech-enabled companies have a strong focus on understanding their capacity to expand their client base. Since revenue in SaaS businesses often relies on recurring payments, the profitability of these companies is heavily dependent on retaining and growing their customer base.
A high revenue retention rate signals to investors that you are successfully generating repeat business from your current customers and minimizing customer attrition. It also demonstrates your ability to replace lost customers with new ones.
Revenue retention can be measured in two distinct ways: gross retention and net retention. Each method provides unique insights into the financial health and growth potential of your business. So, what exactly sets them apart? Let us delve deeper into it and explore how they can help you better understand and assess your business's financial trajectory.
Gross Revenue Retention: Definition, Significance & Calculation
Gross Revenue Retention (GRR) is a vital metric that measures the percentage of revenue retained over a specific period, focusing solely on existing revenue and churned/downgraded revenue. Unlike Net Revenue Retention (NRR), GRR does not include the revenue gained from expansion or upselling to those customers, in its calculation. By evaluating GRR, you can assess your success in customer retention, specifically in maintaining existing Monthly Revenue Retention and managing churn and downgrades.
GRR offers insights into the stability of your revenue and indicates how much additional revenue your company can generate while keeping user spending unchanged. It enables you to monitor your churn rate and understand its impact on your Monthly Recurring Revenue. By tracking GRR, you can identify potential risks of revenue loss in the long run.
How to calculate the gross retention rate?
For gross revenue retention calculation, subtract the revenue churn and downgrade MRR from the starting Monthly Recurring Revenue. Divide the result by the starting amount, and multiply it by 100.
Thus, the gross revenue retention formula is
Gross Retention = ((Total Revenue - Revenue Churn) / Total Revenue) x 100
For example, suppose your business generates $100,000 in revenue in a given month, and you experience a revenue churn of $10,000 during that same period. In that case, your gross retention rate would be:
((100,000 - 10,000)/100,000) x 100 = 90%
GRR percentage ranges from 0% to 100%. As you optimize your business processes and your ratio approaches 100%, you enhance your chances of sustaining a healthy company growth rate.
Also Read: Net Revenue Retention Benchmarks: The Full-On Guide
Net Revenue Retention: Definition, Significance & Calculation
NRR, or Net Revenue Retention, is the percentage of the revenue that can be retained from existing customers within a specific time period. It is also the most basic KPI that determines how successful your product is amongst your customers.
NRR takes into account the total revenue and incorporates various factors, such as revenue churn caused by customer departures or downgrades, as well as revenue expansion resulting from upgrades, cross-sells, or upsells. By considering these elements, NRR enables you to assess your company's growth rate more accurately, providing investors with valuable information to evaluate your prospects.
To calculate Net Revenue Retention:
Subtract the revenue lost from churn and downgrades from the total revenue generated by the existing customer base and express it as a percentage.
Typically, NRR is calculated on an annual or monthly basis.
Net retention revenue or NRR formula is, therefore:
Net Revenue Retention = ((Starting MRR + Expansion MRR - Downgrade MRR - Churn MRR) / Starting MRR) x 100
Another formula that can be used to calculate Net Revenue Retention using total revenue, revenue expansion, and revenue churn is:
Net Retention = (total revenue +revenue expansion - revenue churn)/total revenue) x 100
Both formulas are essentially calculating the same metric, which is Net Revenue Retention. The above 2 formulas are different representations of the calculation for Net Revenue Retention.
Calculating NRR can be done at any time, but most people look at it on a monthly or annual basis.
Net Revenue Retention (NRR) is better explained with this example:
Suppose your business’ monthly revenue is $100,000, and your revenue churn is $10,000 in the same month. Also, assume that your revenue expansion in the same month is $20,000.
Given these numbers, your NRR will be:
((100,000 + 20,000 - 10,000)/100,000) x 100 = 110%
The concept is simple: A highly successful business with happy customers will most likely have an NRR that exceeds 100%, which is undoubtedly a healthy rate. When the upgrades offset the losses, NRR rates can reach above 100%.
Gross Rate Retention Vs. Net Rate Retention: The Differences
Although GRR and NRR are driven by various priorities, they are both critical for customer success.
Gross retention allows you to assess the stability of your revenue by focusing on existing revenue while excluding expansion opportunities. This analysis helps you understand the impact of churns and downgrades on your overall revenue. If you identify that churns and downgrades are negatively affecting your revenue, you can proactively take measures to mitigate these issues. This may involve reaching out to at-risk customers to prevent churn or implementing customer success initiatives to limit downgrades. By leveraging gross retention, you can identify areas of revenue loss and implement preventive strategies to ensure sustained growth and customer satisfaction.
Net Retention allows you to track the growth of your revenue from upgrades, enabling you to develop effective upsell and cross-sell strategies. By monitoring this metric, you can identify areas where improvement is needed and take action to enhance onboarding processes, drive higher adoption rates, and encourage more upgrades. It provides valuable insights to help you recover and ensure a steady revenue increase for your business.
So, what is the best revenue retention rate to use? GRR or NRR?
As mentioned, GRR and NRR are vital parameters that tell you about your company’s financial health because they represent different aspects of your growth and profitability potential.
GRR helps you identify customers who like your products and services and remain with you for a long time.
NRR is a better metric for understanding growth potential because it measures both churn and customer growth.
However, you must bank on both calculations to understand your customer churn inside and out. While they will deliver a balanced picture, you will also understand how much to invest when applying for funds or seeking investors.
GRR Vs. NRR is a never-ending debate. However, as churn indicators, they can correctly indicate what’s hampering your progress, giving you time to rectify and gain the revenue retention you want.
Closing Notes
In conclusion, both Gross Retention and Net Retention are vital metrics that provide valuable insights from different perspectives. Particularly in times of market uncertainty, understanding these metrics and your ability to cultivate new and existing customer relationships becomes essential information for informed decision-making.
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