Guide to Net Revenue Retention & Gross Revenue Retention
As a SaaS company, you’re probably familiar with the word “retention.” However, if the only retention you’re focusing on is customer retention, you’re missing out on two other important metrics: Net Revenue Retention (NRR) and Gross Revenue Retention (GRR). While customer retention concentrates on the number of engaged customers, NRR and GRR focus on how stable the numbers are when it comes to the revenue you’ve generated over a certain period from those customers.
To learn more about NRR and GRR, their importance, and how you can measure and improve them, keep reading.
What is Net Revenue Retention?
Net Revenue Retention (NRR) is the percentage of repeating revenue from existing customers. This percentage is calculated for a specific time period, typically a month or a year. The NRR takes into account revenue from renewals and upgrades, and the revenue lost due to churn and downgrades. The aspects that are included in the NRR will be important later on to distinguish between the NRR and MRR.
In short, the NRR provides you with the big picture when it comes to the trends in your company’s revenue. It also shows you how your upgrades and cross-sales compensate for your customer churn, which I’ll talk more about in the calculation below.
Why is Net Revenue Retention Important?
I don’t need to tell you that you should track your company’s revenue to assess its financial standing. However, the NRR doesn’t only tell you about how good you’re doing in terms of profit.
- Similar to customer churn, the NRR tells you about your customer marketing strategy’s success: if you have a low NRR or see a decreasing trend, you’ll understand that your customers aren’t upgrading or interacting more with your products. In fact, 55% of companies who have high customer engagement have a higher share of revenue. Thus, the NRR helps you understand whether or not your demand generation startegies are working. Maybe you’re not updating your customer base once you have new features. Maybe you’ve focused too much on acquiring new leads, and forgot about advertising for upgrades and cross sells all thogether.
- Upselling can accelarate your company’s profitability significantly: an 8 year profit scenario can become a 5 year scenario with the correct upselling strategies. Since the NRR includes revenue from expansions, a low NRR might also mean that you’re not making use of upselling oppurtunities enough.
- Since NRR only focuses on existing customers’ purchasing behaviour, it also tells you how much you need to acquire new customers. An NRR higher than 100% (which is possible!) would mean that if you had acquired no new leads or customers, you could still grow your company: you’d have enough funds coming from your existing customer base if the trends continued.
How to calculate Net Revenue Retention?
[ MRR at the Start of the Month + Expansions (Upgrades/Upsells, Cross Sales, etc.) – Churn – Cancellations ] / MRR at the Start of the Month
The calculation above gives you your NRR, but let me show you a more detailed description of each step:
- Your monthly recurring revenue (MRR) at the start of the month is basically your average revenue per customer multiplied by the number of customers you have at the beginning of the month (if you’re calculating yearly MRR, you’ll look at the number of customers at the beginning of the year.)
- Expansions include the additional revenue you acquire from customers who upgrade their subscriptions and the cross sales made in the month.
- Churn and cancellation do not mean the same thing, although one could lead to another. Cancellation is when a customer ends their subscription, though they could continue using your other products and return after a short amount of time (or stop buying altogether, resulting in churn.) Churn is when a customer stops doing business with you althogether. Your NRR takes into account both types of losses.
What is Gross Revenue Retention?
Gross Revenue Retention (GRR) is focused more on the revenue that you have lost (or kept) rather than your overall revenue. Similar to the NRR, it’s measured for a month or year. However, the GRR calculation does not take upgrades or cross-sells into account: it shows you how good your company is doing in terms of keeping existing customers’ subscriptions. Since upgrades and cross-sells, usually, don’t happen consistently and continuously over a long period, looking at retention alone proves to be a better metric in certain cases.
Why is Gross Revenue Retention Important?
It may seem unnecessary to use the GRR when you have the NRR, but it has a crucial aspect: since your GRR doesn’t take expansions into account, the revenue that may come from a doesn’t keep you from seeing the older customers that are churning or canceling. I’ll talk more about the differences between the GRR and NRR below, but this is one of the reasons why the two metrics aren’t the same, and why the GRR shouldn’t be ignored.
- Your GRR tells you about the long-term health of your brand. This makes it a crucial metric for investors who may be thinking about getting involved with your company.
- Your long-term standing provides information about the success of your churn optimization stratagies.
- When used together with the NRR, the GRR gives you an idea about how often your customers move down your sales funnel to the retention stage.
How to calculate Gross Revenue Retention?
[ MRR at the Start of the Month – Churn – Cancellations ] / MRR at the Start of the Month
Naturally, the only difference between the GRR calculation and the NRR calculation is the absence of expansions. If you have questions about your MRR, I’ve explained the calculation steps in detail above.
What is the difference between Gross Revenue Retention and Net Revenue Retention?
I’ve been hinting at this difference for a while now: the NRR includes Upgrades, Upsells, Cross-sales, and any other additional purchase made by an existing customer. The GRR does not include these; it only focuses on the MRR, churn, and cancellations.
What would happen if you used one metric and completely ignored the other? If you only focus on the NRR, you’ll care more about making big sales and upgrades to large-scale customers, since these sales will compensate for your smaller customer losses. However, this will result in an unsustainable customer base solely dependant on big customers. On the other hand, if you only focus on your GRR, you put the same amount of effort into extremely valuable and less valuable customers, which is also ineffective. So, as always, balance is key.
What is a good Net Revenue Retention Rate for SaaS?
For Enterprise-level SaaS companies, the median NRR rate is 100%, meaning that the typical monthly recurring revenue stays constant after a month due to compensations made from upgrades, upsells, etc. For SaaS brands targeting small to medium businesses (SMB) or very small businesses (VSB) the median falls to nearly 95%.
So, if you’re in Enterprise SaaS, a good NRR rate would be anything in the upper quartile (between 100% and 110%.) Generally, SaaS companies have a median NRR near 100%, so aim for this number.
How to improve Net Revenue Retention?
What if your NRR is less than 100%? The probable reasons are:
- Not following a good customer marketing strategy,
- Not using a good churn optimization tool like Hockeystack,
- Missing cross-selling and up-selling oppurtunities.
The strategies below can help you increase your NRR to 100% or even higher.
Asking for feedback using churn surveys
Sometimes it’s hard to understand what you’re doing wrong. Just looking at numbers is, most of the time, not enough. That’s why using churn surveys is important: a good tool like HockeyStack can provide you with both the data you need and the survey tool you’re looking for.
Surveys mean directly going to the source of churn: customers. There may be a UX issue you’re unaware of, there may be an essential feature that your product is lacking that your competition has, or maybe a reason that you can’t even predict.
Provide excellent customer service
Good customer service helps you keep the revenue coming from your customer base by minimizing churn. It also increases your chances of cross-selling and up-selling. I know that this is easier said than done, but providing you with key points might make your life easier:
- While structuring your marketing team, take a customer-centered approach. Have positions that focus on your customers’ journeys, assisting them whenever customers need them to.
- Time is of essence: nearly 70% of consumers say that their customer experience is heavily determined by whether or not they have received quick assistance from a brand. That’s why you need to have an effective structure that can act quickly.
- Give customers VIP treatment from day one. This looks like welcome and discount emails, acting on the feedback you receive, etc.
Analyze and optimize product engagement
Understanding your customers’ experience with your product is essential if you want to keep their business. Following the steps below can help you analyze their product use and optimize their experiences.
- Lead them to the “aha!” moment with a good onboarding flow.
This is especially important to engage newer customers. By giving a walk-through of your product, you’re showing them why your service is useful instead of having them look for reasons. Their “aha!” moment is when they understand what is special about your brand and how your product answers their needs. A good onboarding flow ensures that they don’t miss the key features that might lead them to this moment. This flow also helps you “hook” customers to your product by making it an essential tool for them.
2. Make sure your new features are seen.
Your newly added feature may be exactly what your customers were looking for, but it’s useless if no one knows that it exists. Emails and blog posts are great at announcing the launch of your new features, but concise in-app call-outs are even better.
3. Effective UX writing is key.
The microcopy in your product can help customers complete actions, and even lead free-trial users to an upgraded version if created carefully. Understandable UX writing with clear and concise CTAs and a bit of your brand’s personality will increase product engagement significantly.
Both the NRR and GRR are useful KPIs that reveal different information about your company. The GRR is better at measuring long-term health since it doesn’t take into account the expansions that may not be continuous. The NRR is better at measuring the growth of your company based on your existing customer base. When used together, these metrics can help you understand whether or not you should focus on lowering churn rates, generating demand, or increasing product engagement.
No. Customer retention focuses on the rate of engaged customers you’ve kept over time, regardless of the revenue they bring. Net revenue retention focuses on the revenue you’ve retained over a period of time, which is connected to both the number of customers and your recurring revenue.
Up-sells, cross-sells, and upgrades may result in more revenue generated than the revenue lost, which returns an NRR rate over 100%.
While there’s no set cost to retaining customers, the price is almost always less expensive than acquiring new ones: customer acquisition has been proven to be 5 times more expensive than customer retention.