Understanding Net Retention vs. Gross Retention: Key Metrics for Business Success

In the world of subscription-based businesses, particularly in the SaaS industry, understanding customer retention is crucial. Two important metrics that help gauge a company's retention performance are Net Revenue Retention (NRR) and Gross Revenue Retention (GRR). Though they may seem similar, they provide different insights into business health. Let's delve into these metrics and their significance.

What is Gross Revenue Retention (GRR)?

Gross Revenue Retention measures a company's ability to retain its core revenue from existing customers, without considering any additional revenue from upsells or cross-sells. Essentially, GRR focuses on how well a company maintains its recurring revenue streams, excluding any expansion revenue.

Gross Retention Formula

The formula for calculating GRR is:

GRR = ( Recurring Revenue at End of Period−Churned Revenue​ / Recurring Revenue at Start of Period ) x 100

For example, if a company starts with $27,000 in monthly recurring revenue (MRR) and ends with $22,000 due to $5,000 in churned revenue, the GRR would be 81% .

What is Net Revenue Retention (NRR)?

Net Revenue Retention provides a more comprehensive view by including upsell and cross-sell revenues in addition to the retained revenue. NRR reflects a company's ability to not only retain customers but also expand revenue from its existing customer base.

Net Retention Formula

The formula for calculating NRR is:

NRR = ( Recurring Revenue at End of Period / Recurring Revenue at End of Period+Upsell Expansion Revenue−Churned Revenue / Recurring Revenue at Start of Period ) * 100

For instance, if a company starts with $100,000 in recurring revenue, gains $2,000 in upsell revenue, and loses $3,000 from churned customers, the NRR would be 96%.

GRR vs. NRR: Key Differences

• Scope of Measurement: GRR measures the retention of existing revenue without considering any upsell or expansion, making it a more conservative metric. In contrast, NRR includes expansion revenue, providing insights into both retention and growth from existing customers .
• Business Insights: GRR is crucial for understanding pure customer retention and the stability of existing revenue streams. NRR, however, offers a broader perspective on customer satisfaction and the effectiveness of upselling strategies .

Why Both Metrics Matter

While both GRR and NRR are essential, they serve different purposes:

• GRR helps identify potential retention issues and assess the effectiveness of customer success efforts in maintaining existing revenue.
• NRR highlights growth opportunities within the existing customer base and indicates overall business health and customer satisfaction.

For subscription-based businesses, maintaining a balance between these metrics is vital. A high GRR indicates strong customer retention, while a high NRR suggests successful upselling and cross-selling strategies. Together, they provide a comprehensive view of a company's performance and potential for growth.

Conclusion

Understanding and tracking both Gross Revenue Retention and Net Revenue Retention are critical for subscription-based businesses aiming to optimize customer success and revenue growth. By focusing on these metrics, companies can better strategize to enhance customer retention, maximize upselling opportunities, and ultimately drive long-term business success.