When assessing the health of a business, particularly in subscription and payment sectors, two key indicators stand out:
- Net Revenue Retention (NRR)
- Gross Revenue Retention (GRR)
Although these two metrics are related, they offer different perspectives on managing financial flows and customer relationships.
This article will explain the difference between these two indicators, the importance of net revenue retention, and how to use it to evaluate your business’s financial performance.
Understanding the Difference Between Net and Gross Revenues
Before delving into the analysis of net revenue retention strategies, it is crucial to fully understand the fundamental distinction between net and gross revenues.
What is Net Revenue Retention (NRR)?
Net Revenue Retention (NRR) is a key metric that measures a company’s ability to maintain and increase revenue generated by its existing customers over a given period.
This figure reflects the true profitability of a business, taking into account the remaining revenue after deducting all costs and charges such as production costs, taxes, overheads, and other operational expenses.
By providing an overview of the company’s performance, NRR helps evaluate its sustainability and financial health.
What is Gross Revenue Retention (GRR)?
Gross Revenue Retention (GRR) measures the percentage of recurring revenue retained from existing customers over a specific period, excluding any revenue growth from upselling, cross-selling, or extended offers.
This indicator focuses solely on the revenue loss due to « attrition, » meaning customers downgrading to a lower-tier service or cancelling subscriptions.
How to Calculate Gross/Net Revenue Retention?
Calculating gross and net revenue retention is essential for evaluating a company’s long-term performance, especially its ability to retain and grow revenue from existing customers.
Each retention type (gross or net) considers different factors and requires specific calculation methods.
How to Calculate Gross Revenue Retention?
To determine gross revenue retention, start by taking the recurring revenue at the end of a given period. Next, subtract the revenue generated from upselling or expansions made during that period. Divide the result by the recurring revenue at the beginning of the period, then multiply by 100 to get a percentage. The formula is as follows:
GRR (%) = ((Recurring revenue at the end of the period – Revenue from upselling or expansions during the period) ÷ Recurring revenue at the beginning of the period) x 100
For example, a company starts the month with $100,000 in recurring revenue. By the end of the month, its recurring revenue stands at $97,000, with $2,000 coming from upselling during the month. In this case, the company has retained 95% of its original recurring revenue, excluding the upselling and expansion revenue.
How to Calculate Net Revenue Retention?
Net Revenue Retention (NRR) takes into account not only the revenue losses due to customer attrition but also the revenue generated from upselling, cross-selling, or expansions within the existing customer base. Here’s how to proceed with the calculation.
To calculate net revenue retention, begin by taking the recurring revenue at the end of the period. Add the revenue from upselling, cross-selling, or expansions during the period, then subtract the lost revenue due to customer attrition. Divide this result by the recurring revenue at the beginning of the period and multiply by 100 to get a percentage. The formula is as follows:
NRR (%) = ((Recurring revenue at the end of the period + Revenue from upselling or expansions – Revenue lost due to attrition) ÷ Recurring revenue at the beginning of the period) x 100
For example, a company starts the month with $100,000 in recurring revenue. At the end of the month, its recurring revenue stands at $97,000 due to attrition from some customers switching to lower-tier offers or competitors. In parallel, the company generated $2,000 from upselling its existing customers but lost $3,000 due to attrition.
The NRR in this case is calculated as follows:
NRR (%) = ((97,000 + 2,000 – 3,000) ÷ 100,000) x 100 = 96%
This means the company has retained 96% of its revenue, considering all gains and losses related to its existing customer base.
What Are Good Indicators of Net and Gross Revenue Retention?
According to a 2023 report by SaaS Capital, the median net retention rate for Software-as-a-Service (SaaS) companies is 102%, while the median gross retention rate is 91%. But what exactly constitutes a « good » net or gross revenue retention rate?
Net Revenue Retention (NRR) Indicators
- Less than 100%: A NRR below 100% indicates that revenue losses from cancellations and downgrades are greater than the revenue generated from upselling or expansions. This shows that the business is losing more revenue than it creates from its existing customer base.
- 100%: A NRR of 100% means that revenue losses are offset by revenue from expansions, upselling, or cross-selling, indicating revenue stability from the customer base.
- More than 100%: A NRR above 100% is an excellent sign for most subscription-based businesses. It shows that the business is growing within its existing customer base, with upselling and expansions outweighing losses due to attrition.
- Good Indicator: Many high-performing SaaS businesses aim for a NRR of at least 110%.
Gross Revenue Retention (GRR) Indicators
- 70 to 85%: A GRR within this range can be concerning, especially if it’s on a downward trend, as it suggests significant revenue loss.
- 85 to 95%: For many SaaS businesses, this range is acceptable, although aiming for the upper limit is preferable.
- 95% and above: A GRR of 95% or more is excellent, demonstrating that the business is effectively retaining its existing revenue by minimizing attrition and downgrades.
- Good Indicator: For most SaaS businesses, a GRR of 90% or more is considered a good result.
These indicators can vary depending on the sector, market dynamics, product nature, and other factors. However, consistently high net and gross retention rates generally signify strong customer loyalty, with satisfied customers and products that meet their expectations.
How to Improve Net and Gross Revenue Retention
Improving both net and gross revenue retention is crucial for the long-term stability of businesses, particularly those offering subscriptions. Several strategies can be implemented to achieve this.
Proactive support teams, capable of anticipating customer needs and providing tailored solutions, are key. Additionally, in-depth customer behavior analysis helps better understand their expectations, optimize engagement, and reduce the risk of attrition.
Using predictive analytics to identify at-risk customers and propose targeted actions is an effective approach to prevent revenue loss. Dynamic account management, with dedicated account managers, ensures a continuous and personalized relationship, thereby strengthening retention. Furthermore, offering flexible subscription models that meet diverse customer needs helps reduce the likelihood of customers switching to competitors.
Finally, encouraging referrals through referral programs and creating an active community strengthens engagement and creates a positive dynamic around the business.
By combining these approaches, companies can not only increase their net and gross revenue retention but also enhance their market position and ensure stable growth.
When assessing the health of a business, particularly in subscription and payment sectors, two key indicators stand out:
- Net Revenue Retention (NRR)
- Gross Revenue Retention (GRR)
Although these two metrics are related, they offer different perspectives on managing financial flows and customer relationships.
This article will explain the difference between these two indicators, the importance of net revenue retention, and how to use it to evaluate your business’s financial performance.
Understanding the Difference Between Net and Gross Revenues
Before delving into the analysis of net revenue retention strategies, it is crucial to fully understand the fundamental distinction between net and gross revenues.
What is Net Revenue Retention (NRR)?
Net Revenue Retention (NRR) is a key metric that measures a company’s ability to maintain and increase revenue generated by its existing customers over a given period.
This figure reflects the true profitability of a business, taking into account the remaining revenue after deducting all costs and charges such as production costs, taxes, overheads, and other operational expenses.
By providing an overview of the company’s performance, NRR helps evaluate its sustainability and financial health.
What is Gross Revenue Retention (GRR)?
Gross Revenue Retention (GRR) measures the percentage of recurring revenue retained from existing customers over a specific period, excluding any revenue growth from upselling, cross-selling, or extended offers.
This indicator focuses solely on the revenue loss due to « attrition, » meaning customers downgrading to a lower-tier service or cancelling subscriptions.
How to Calculate Gross/Net Revenue Retention?
Calculating gross and net revenue retention is essential for evaluating a company’s long-term performance, especially its ability to retain and grow revenue from existing customers.
Each retention type (gross or net) considers different factors and requires specific calculation methods.
How to Calculate Gross Revenue Retention?
To determine gross revenue retention, start by taking the recurring revenue at the end of a given period. Next, subtract the revenue generated from upselling or expansions made during that period. Divide the result by the recurring revenue at the beginning of the period, then multiply by 100 to get a percentage. The formula is as follows:
GRR (%) = ((Recurring revenue at the end of the period – Revenue from upselling or expansions during the period) ÷ Recurring revenue at the beginning of the period) x 100
For example, a company starts the month with $100,000 in recurring revenue. By the end of the month, its recurring revenue stands at $97,000, with $2,000 coming from upselling during the month. In this case, the company has retained 95% of its original recurring revenue, excluding the upselling and expansion revenue.
How to Calculate Net Revenue Retention?
Net Revenue Retention (NRR) takes into account not only the revenue losses due to customer attrition but also the revenue generated from upselling, cross-selling, or expansions within the existing customer base. Here’s how to proceed with the calculation.
To calculate net revenue retention, begin by taking the recurring revenue at the end of the period. Add the revenue from upselling, cross-selling, or expansions during the period, then subtract the lost revenue due to customer attrition. Divide this result by the recurring revenue at the beginning of the period and multiply by 100 to get a percentage. The formula is as follows:
NRR (%) = ((Recurring revenue at the end of the period + Revenue from upselling or expansions – Revenue lost due to attrition) ÷ Recurring revenue at the beginning of the period) x 100
For example, a company starts the month with $100,000 in recurring revenue. At the end of the month, its recurring revenue stands at $97,000 due to attrition from some customers switching to lower-tier offers or competitors. In parallel, the company generated $2,000 from upselling its existing customers but lost $3,000 due to attrition.
The NRR in this case is calculated as follows:
NRR (%) = ((97,000 + 2,000 – 3,000) ÷ 100,000) x 100 = 96%
This means the company has retained 96% of its revenue, considering all gains and losses related to its existing customer base.
What Are Good Indicators of Net and Gross Revenue Retention?
According to a 2023 report by SaaS Capital, the median net retention rate for Software-as-a-Service (SaaS) companies is 102%, while the median gross retention rate is 91%. But what exactly constitutes a « good » net or gross revenue retention rate?
Net Revenue Retention (NRR) Indicators
- Less than 100%: A NRR below 100% indicates that revenue losses from cancellations and downgrades are greater than the revenue generated from upselling or expansions. This shows that the business is losing more revenue than it creates from its existing customer base.
- 100%: A NRR of 100% means that revenue losses are offset by revenue from expansions, upselling, or cross-selling, indicating revenue stability from the customer base.
- More than 100%: A NRR above 100% is an excellent sign for most subscription-based businesses. It shows that the business is growing within its existing customer base, with upselling and expansions outweighing losses due to attrition.
- Good Indicator: Many high-performing SaaS businesses aim for a NRR of at least 110%.
Gross Revenue Retention (GRR) Indicators
- 70 to 85%: A GRR within this range can be concerning, especially if it’s on a downward trend, as it suggests significant revenue loss.
- 85 to 95%: For many SaaS businesses, this range is acceptable, although aiming for the upper limit is preferable.
- 95% and above: A GRR of 95% or more is excellent, demonstrating that the business is effectively retaining its existing revenue by minimizing attrition and downgrades.
- Good Indicator: For most SaaS businesses, a GRR of 90% or more is considered a good result.
These indicators can vary depending on the sector, market dynamics, product nature, and other factors. However, consistently high net and gross retention rates generally signify strong customer loyalty, with satisfied customers and products that meet their expectations.
How to Improve Net and Gross Revenue Retention
Improving both net and gross revenue retention is crucial for the long-term stability of businesses, particularly those offering subscriptions. Several strategies can be implemented to achieve this.
Proactive support teams, capable of anticipating customer needs and providing tailored solutions, are key. Additionally, in-depth customer behavior analysis helps better understand their expectations, optimize engagement, and reduce the risk of attrition.
Using predictive analytics to identify at-risk customers and propose targeted actions is an effective approach to prevent revenue loss. Dynamic account management, with dedicated account managers, ensures a continuous and personalized relationship, thereby strengthening retention. Furthermore, offering flexible subscription models that meet diverse customer needs helps reduce the likelihood of customers switching to competitors.
Finally, encouraging referrals through referral programs and creating an active community strengthens engagement and creates a positive dynamic around the business.
By combining these approaches, companies can not only increase their net and gross revenue retention but also enhance their market position and ensure stable growth.
