When it comes to evaluating the health of a business, especially one with a subscription model, two metrics can act as barometers for how well the business maintains its relationship with existing customers. Both of these metrics – net revenue retention (NRR) and gross revenue retention (GRR) – provide important information, yet they offer different insights.

Below is an overview of what businesses need to know about net revenue retention and gross revenue retention, including what they are, how they differ and how to use both to generate insights into the overall health of your revenue.

What's in this article?

• What is net revenue retention?
  
• How is net revenue retention calculated?
  
• What is gross revenue retention?
  
• How is gross revenue retention calculated?
  
• Net revenue retention vs gross revenue retention
  
• What are good benchmarks for net revenue retention and gross revenue retention?
  
• How to improve net revenue retention and gross revenue retention
  

What is net revenue retention?

Net revenue retention is a metric that reflects a company's ability to retain and grow revenue from its existing customer base over a given period of time. This metric provides insights into a business's overall health and sustainability.

How is net revenue retention calculated?

Net revenue retention takes into account both the revenue lost due to churned customers and the revenue gained from existing customers through upsells, cross-sells or expansions. Here's how it is calculated.

Find the net revenue retention by taking the recurring revenue at the end of a period – adding any upsell, cross-sell or expansion revenue – and then subtracting the revenue from churned customers. Next, divide the result by the recurring revenue at the start of the period. Finally, multiply the outcome by 100 to find the percentage. Here's the formula:

NRR % = ((Recurring revenue at end of period + upsell or expansion revenue during the period - churned revenue during the period) ÷ recurring revenue at the start of the period) × 100

For instance, let's say that a company begins the month with US$100,000 in recurring revenue. And by the end of the month, the recurring revenue is US$97,000 due to some customers downgrading or leaving. The company gains US$2,000 in upsell revenue from existing customers and loses US$3,000 from churned customers.

The net revenue retention would be:

NRR % = ((US$97,000 + US$2,000 - US$3,000) ÷ US$100,000) × 100 = 96%

This means that the company retained 96% of its net revenue, accounting for both the revenue losses and gains among existing customers.

What is gross revenue retention?

Gross revenue retention is a metric that quantifies the percentage of recurring revenue retained from existing customers over a specific amount of time, excluding any upsell, cross-sell or expansion revenue. It focuses solely on the potential revenue loss, often called "churn", from existing customers who either downgrade or cancel their subscriptions.

How is gross revenue retention calculated?

To find gross revenue retention, take the recurring revenue at the end of a period and subtract any upsell or expansion revenue. Then, divide that by the recurring revenue at the start of the period. Finally, multiply the result by 100 to find the percentage. Here's the formula:

GRR % = ((Recurring revenue at the end of the period - upsell or expansion revenue during the period) ÷ recurring revenue at the start of the period) × 100

Let's say that a company begins the month with US$100,000 in recurring revenue. And by the end of the month, the recurring revenue is US$97,000, but there is also US$2,000 in upsell revenue during the month. In this example, the company will retain 95% of its recurring revenue from existing customers. This excludes the impact of upsells or expansions.

Net revenue retention vs gross revenue retention

Both NRR and GRR are key metrics for businesses, especially those with subscription-based models, because they offer insights into the health and sustainability of revenue streams from existing customers. Here's a rundown of their technical differences, similarities and the distinctions surrounding their impact and implications:

Technical differences

• Net revenue retention (NRR): this metric takes into account both the negative impacts (churned revenue) and the positive impacts (upsell, cross-sell or expansion revenue) on the recurring revenue during a given period.

• Gross revenue retention (GRR): this metric focuses solely on the negative impacts, specifically the revenue lost due to downgrades or customer churn. It does not factor in any upsell or expansion revenue.

Similarities

• Focus on existing customers: both metrics revolve primarily around a company's existing customer base, rather than new customer acquisition.

• Recurring revenue: both metrics use recurring revenue as the foundational component in their calculations, reflecting the sustainability of current business operations.

Impact and implications

Business health and stability

• NRR: a high NRR indicates that a company is retaining customers and also upselling or expanding its services successfully among existing clients. An NRR of over 100% suggests that growth from upsells and expansions exceeds lost revenue, signalling a strong position.
  
• GRR: a high GRR signifies that a company is retaining its existing revenue streams effectively. A declining GRR can be an early warning sign of potential issues in customer satisfaction, service quality or market positioning.
  

Growth potential

• NRR: NRR provides a more comprehensive view of growth potential. A high NRR suggests that the business can grow its revenue without relying too much on new customer acquisition.
  
• GRR: by excluding upsells and expansions, GRR reflects a company's ability to maintain its existing revenue base.
  

Strategic implications

• NRR: if this is low, it suggests that the business might need to re-evaluate upselling and cross-selling strategies. Conversely, a high NRR indicates effective customer account growth and expansion strategies.
  
• GRR: a declining GRR can prompt businesses to reassess their core offerings, customer support or overall customer experience.
  

Overall, gross revenue retention reflects a company's ability to keep its core revenue intact. Think of it as a measure of a business's defences – how well can the business hold on to the revenue it already has? A high GRR indicates minimal revenue loss due to factors such as customer churn or downgrades. It's a foundational metric that shows the stability of a company's existing relationships, offering a base level of customer satisfaction.

Net revenue retention, conversely, takes a more expansive view. While it considers the losses factored into GRR, it also accounts for the gains. This metric reflects both the company's defensive stance in preserving revenue and its offensive strategy to grow revenue within its current customer base through upsells and expansions. A high NRR suggests that a company is not just maintaining its customer base, but also expanding its value.

When taken together, these two metrics provide businesses with a comprehensive picture of customer health. While GRR signals the strength of the foundation, NRR provides insights into growth potential without the need for new customer acquisition. Together, these metrics show how existing customers perceive the value of the company's offerings. If customers find value, they'll stay with the service and often spend more.

What are good benchmarks for net revenue retention and gross revenue retention?

According to a 2023 report by SaaS Capital, the median net retention across all software-as-a-service (SaaS) companies is 102%, while the median gross retention is 91%. But what's considered to be a "good" NRR and GRR?

Net revenue retention (NRR) benchmarks

• Below 100%: this indicates that churn and downgrades are outpacing any additional revenue from upsells or expansions. It's a warning sign that more revenue is disappearing within the existing customer base than is being created.

• 100%: this means that any lost revenue is offset by gains from expansions, upsells or cross-sells. Essentially, your customer base's revenue potential is stable.

• Above 100%: this is ideal for many subscription-based businesses. It indicates that the business is growing its revenue from the existing customer base, meaning that upsells and expansions surpass any revenue losses.

• Typical good benchmark: many successful SaaS companies aim for an NRR rate of 110% or above.

Gross revenue retention (GRR) benchmarks

• 70% to 85%: businesses might find a GRR in this range concerning, especially if it's trending downwards. It suggests that a significant portion of recurring revenue is being lost.

• 85% to 95%: this is a decent range for many SaaS companies, although the closer the GRR is to the higher end, the better.

• 95% and above: this is an excellent range and indicates that the business is maintaining its existing revenue streams effectively, with minimal churn or downgrades.

• Typical good benchmark: for most SaaS businesses, a GRR rate of 90% or higher is considered to be healthy.

These benchmarks can vary based on the industry, market dynamics, the nature of the product and other factors. However, achieving high retention rates consistently – both net and gross – usually indicates that a company is in a solid position regarding customer satisfaction and product-market fit.

How to improve net revenue retention and gross revenue retention

For businesses, especially those with a subscription model, retention metrics offer a window into the health of customer relationships. In this sense, NRR and GRR are important for gauging how well a company is maintaining and expanding its revenue streams. Here are some specific strategies to bolster these metrics:

• Expert customer-support teams
  Develop teams that are proactive (not reactive) in understanding customer needs. For a subscription model, customer support should be trained not only to handle technical issues, but also to identify and anticipate customer needs based on their activity and subscription tier. These teams should be equipped with the authority and ability to offer immediate, personalised solutions, such as account optimisations, tailored plans and usage-based recommendations to enhance customer reliance on your product.

• Deep analytics for customer engagement
  A subscription-based business must have a system for monitoring and analysing customer-usage patterns. With this data, you can identify what customers value most and where there is room for growth. This information should guide the development of new features and improvements. It should also allow for targeted communication that educates customers about the full potential of your product, leading to increased engagement and a reduced likelihood of churn.

• Proactive churn prevention
  Implement advanced predictive analytics to identify at-risk customers before they decide to cancel. By analysing behaviour patterns and usage data, your team can intervene with personalised incentives, assistance or product enhancements. This might include offering educational content, customer tips or targeted offers, which re-engage customers and address their specific usage scenarios.

• Dynamic account management
  For clients who are key to your revenue, assign account managers who can offer personalised attention. Account managers should be responsible for regular check-ins, understanding the business needs of the clients and confirming that the product is delivering expected outcomes. They can also guide customers through new features and optimisations that can upgrade their experience and prevent them from moving to a new provider.

• Flexible subscription models
  Create a range of subscription options to cater to the diverse needs of your customer base. This flexibility can help you customers who might otherwise cancel due to a mismatch between their needs and your service levels. Consider implementing a downgrade option for customers who may not need your full suite of services but could still benefit from a smaller subscription, in order to prevent them from leaving entirely.

• Referral programmes and community building
  Encourage existing subscribers to bring in new business by implementing a referral programme with tangible benefits. In addition to improving the experience for your existing customers, cultivating a sense of community among customers can create a network effect. Businesses can achieve this through customer groups, forums or webinars where customers can exchange tips, stories and best practices that add value beyond the core product offering.

• Continuous product refinement
  Invest resources in continuous product development. Regular updates based on customer feedback and market trends will keep your product relevant. An ambitious road map, one that customers are aware of, can mean the difference between a customer staying for the next big feature or leaving for a competitor.

• Transparent and flexible contracts
  Subscription businesses should have transparent contracts that outline the terms and conditions of their service clearly. Offering flexible terms, such as easy cancellation or pauses in the subscription, can increase customer retention by reducing the hesitation that often comes with long-term commitments.

• Customer success benchmarks
  Set clear, data-driven goals for customer retention and success. These goals should be based on historical data, industry standards and the unique aspirations of your business. Track these metrics closely to understand the health of your customer base, and make them a central part of performance reviews and strategic meetings.

• Ongoing customer feedback loop
  Establish a structured system for gathering and analysing customer feedback. Regular surveys, feedback forms within the product and open channels for communication can provide insights into customer satisfaction and areas for improvement. Act on this feedback promptly and visibly, so that customers feel like their input has a direct impact on the product.