Gross revenue retention (GRR) is a key metric for businesses that want to measure the stability of their recurring revenue. Because GRR focuses solely on the existing customer base and does not include new sales or upsells, it's an effective tool for understanding how much revenue a business can retain without considering expansion efforts. A SaaS Capital report from 2023 indicates that the median GRR for business-to-business software-as-a-service (SaaS) businesses of varying sizes ranges from 90% to 93%, which demonstrates the typical revenue that businesses retain from existing contracts.
Below, we'll break down the specifics of GRR, how it's calculated and why it matters. For businesses, particularly those with a subscription model, understanding GRR can provide clarity on revenue patterns and indicate areas for improvement. GRR is a straightforward metric, but its implications for business health and strategy are profound.
What's in this article?
- What is gross revenue retention?
- How is gross revenue retention calculated?
- Net revenue retention vs gross revenue retention
- Why does gross revenue retention matter for businesses?
- What is a good gross revenue retention benchmark?
- How to improve gross revenue retention
What is gross revenue retention?
Gross revenue retention evaluates the stability of a business's recurring revenue from its existing customers over a given period, without considering added revenue from upsells or cross-sells. This metric provides a focused view of how much business an organisation retains purely from its established customer base.
How is gross revenue retention calculated?
Gross revenue retention helps businesses to gauge the stability of their recurring revenue separately to the influence of new sales or customer expansions, providing organisations with a clearer picture of their financial stability.
Here's how to calculate GRR:
GRR = (Starting MRR - Downgrade and churned MRR) / Starting MRR x 100%
Where:
- Starting MRR is the monthly recurring revenue at the start of the period under consideration.
- Downgrade and churned MRR is the recurring revenue that is lost from customers who downgraded their subscription or exited during the period in question.
For instance, consider a business that started the month with US$100,000 in MRR. Over the month, it lost US$5,000 because of downgrades and cancellations. Here's how we would find the GRR:
Starting MRR: US$100,000
Losses (downgrades and cancellations): US$5,000
GRR calculation:
Starting MRR - Losses (US$100,000 - US$5,000)
= US$95,000 / starting MRR (US$100,000)
= 0.95 x 100
= 95%
The business's GRR at the end of the month would be 95%. This result indicates that the business retained most of its initial revenue from its existing customers, excluding the effect of expansions.
In practical terms, a consistently high GRR indicates a stable recurring revenue base. If the GRR begins to dip, it can be an early warning signal, pointing towards possible issues with the product, pricing or customer satisfaction. With this knowledge, businesses can act promptly to address potential problems and keep their revenue streams stable.
Net revenue retention vs gross revenue retention
Net revenue retention (NRR) and gross revenue retention are key metrics for businesses, particularly those with recurring revenue models, such as subscription-based services. Here are the differences between NRR and GRR:
Net revenue retention
Definition: NRR measures how well a business retains its existing revenue from current customers over a specific period of time, while also accounting for upgrades, downgrades and churn.
Insights: NRR produces a holistic view of customer revenue health. An NRR greater than 100% indicates growth from the existing customer base, while a number of less than 100% can point to potential challenges in customer satisfaction or product fit.
Gross revenue retention
Definition: GRR evaluates the stability of a business's recurring revenue from existing customers over a given period of time, without considering the influence of upsells or cross-sells. It's a purer measure of revenue preservation.
Insights: GRR is a focused metric which indicates the natural retention of a business's revenue. A high GRR suggests a strong product-market fit and satisfied customers. If this metric begins to drop, it might signal greater problems with the core product or service.
Although both metrics evaluate revenue retention, NRR takes a more comprehensive approach, accounting for the positive (expansions) and negative (churn and contractions) movements in revenue. GRR, on the other hand, focuses strictly on the negative movements in revenue, providing a more conservative view of revenue stability. For a complete picture of customer revenue health, businesses should monitor both metrics closely.
Why does gross revenue retention matter for businesses?
Gross revenue retention is a pivotal metric that allows businesses to assess the stability of their recurring revenue solely from their existing customer base without the influence of additional sales or expansions. Examining GRR closely can help businesses to better understand their financial health.
Why GRR matters for businesses
Revenue stability indicator: A steadfast GRR signifies a business's ability to maintain its base revenue, which reflects a stable relationship with existing customers. A business's ability to sustain or even grow its core revenue affirms the value that it provides to current subscribers.
Predictability: A stable GRR can make revenue streams more predictable, which is invaluable for planning and budgeting: businesses can set more accurate financial targets and allocate resources with confidence.
Customer loyalty gauge: Although it doesn't account for upsells, GRR still acts as a measure of customer loyalty. If customers are renewing regularly without downgrading, it indicates sustained satisfaction with the product or service.
What GRR indicates
Health of core offering: GRR focuses on the core product or service and doesn't factor in expansions. A high GRR suggests that the foundational offerings of a business continue to resonate with customers.
Churn details: GRR offers insights into how much revenue is lost because of downgrades or complete exits. Unlike NRR, while it doesn't include a full view of customer sentiment, it does provide insights into areas in which the product or service might fall short for some customers.
Operational efficiency: A consistent GRR reflects well on a business's operations, suggesting that customer support, product delivery and other operational facets are executed effectively.
Impact of GRR on businesses
Strategic adjustments: Recognising trends in GRR can lead to important changes in business strategy. If GRR begins to dip, businesses may consider improving their product features, modifying their pricing strategy or enhancing customer support.
Attractiveness to stakeholders: Stakeholders and investors often look for stable or growing revenue streams as an indicator of a business's health. A solid GRR can offer this assurance by showcasing the business's ability to maintain its existing revenue base.
Resource optimisation: Monitoring GRR can help illuminate where businesses should direct their resources. If GRR is declining, businesses could shift their efforts towards improving customer experience or refining the core product, rather than focusing on new customer acquisition.
GRR is a foundational metric that helps businesses to evaluate the resilience of their recurring revenue, as well as to understand the health of their core offerings and the loyalty of the customer base. For businesses that want to prioritise sustainable growth and financial predictability, keeping a close eye on GRR is key.
What is a good gross revenue retention benchmark?
Gross revenue retention is an indispensable metric for all businesses, especially those in the SaaS sector or other subscription-based models. But what constitutes a good GRR benchmark?
Typically, a GRR of 85% or above is considered healthy. However, the ideal benchmark can vary depending on the industry and business model:
SaaS businesses: For most SaaS businesses, a GRR rate of 90% or above is ideal. High-performing SaaS businesses, especially those in the enterprise segment, sometimes achieve GRR rates of 95% or even higher.
Customer-subscription services: Given the volatile nature of customer preferences, these services may have a slightly lower GRR benchmark. Anything above 80% could be seen as healthy.
Traditional business models: For non-subscription businesses or those outside the tech sector, the benchmark for GRR differs based on industry standards, competition and market conditions.
Startups vs mature businesses: Startups, especially in their early stages, may experience a lower GRR because of product iteration and challenges surrounding market fit. In contrast, mature businesses with established customer bases and proven products should expect – and work towards – higher GRR rates.
Although these benchmarks provide a general guideline, the optimal GRR should be highly individualised. Factors that can influence what a good GRR rate looks like for a particular business include the business's stage, target audience, pricing strategy and competitive environment.
Although aiming for a high GRR is important, businesses should not fixate solely on this metric. Instead, they should analyse it in conjunction with other key metrics, such as net revenue retention, customer acquisition cost and lifetime value to get a comprehensive view of business health.
How to improve gross revenue retention
Improving gross revenue retention is a pressing concern for many businesses, especially those with subscription models. A robust GRR signifies a stable revenue stream from your existing customer base, which suggests that your core offerings are resonating. But if you find your GRR lacking, there are steps that you can take to elevate it:
Customer feedback: Actively seek feedback from your customers. Regular check-ins or surveys can bring issues or areas of dissatisfaction to light. Addressing these concerns head-on can prevent downgrades or cancellations.
Product improvement: Refine your product or service continuously based on feedback and emerging industry trends. A product that evolves with customer needs is more likely to retain its user base.
Proactive customer support: Instead of waiting for customers to come to you with issues, establish a proactive support system. Offer tutorials, webinars or regular product updates to pre-empt common problems.
Flexible pricing: If you notice that customers are downgrading or leaving because of pricing, consider introducing more flexible pricing options or tiers. A more diverse pricing structure can cater to a wider range of customer needs.
Monitor usage patterns: Analyse how customers use your product. If certain features are underused, it may be because of a lack of awareness or unnecessary complexity. Highlighting or simplifying these features can enhance the user experience.
Renewal reminders: Sometimes, customers let their subscriptions lapse unintentionally. Automated reminders leading up to renewal dates can help to retain those who are on the fence.
Build a community: Create a sense of community among your customers. Forums, user groups and community events can make customers feel more connected and less likely to leave.
Contract structuring: Consider offering long-term contracts with favourable terms for early renewals or multi-year commitments. This secures revenue and can build stronger customer relationships.
Overall, elevating GRR requires a combination of understanding your customers, refining your offerings and remaining proactive about engagement. Each interaction with your customers is an opportunity to reinforce value, build trust, and lay the foundations for long-term revenue stability.