Measure Net vs. Gross Revenue Retention the Right Way

Net Revenue Retention

Net revenue retention (NRR) is a metric that compares the revenue generated from a customer at the time of their sign-up to the revenue generated from that same customer during the current period. Net revenue retention is also known as net dollar retention (NDR). 

Net revenue retention accounts for revenue losses due to customer churn or downgrading. It also accounts for any increases in total revenue (annual recurring revenue, ARR or monthly recurring revenue, MRR) over a predetermined time frame. NRR is a vital metric for SaaS companies and other businesses to track. It is essential because it reveals whether or not the product or services you offer have value for your current customers. 

The metric also shows whether or not the current customers are satisfied with your SaaS pricing strategy, response time, and reliability. Furthermore, NRR aids in customer success evaluation. It also shows how well your business is fairing in securing repeat business from current clientele and generating additional revenue from them.

 

Why Is Your Net Revenue Retention Rate Important?

 Net revenue retention rate is a detailed metric that accounts for expansion or upgrades (upsell or cross-sells to existing customers) and churn or downgrades (loss of customer value). When running a business, it is easy to focus on attracting new customers and expanding your customer base. While doing that is essential in growing a business, it is also important to consider the cost of acquiring new customers (CAC).  

You consider your CAC because acquiring a new customer usually costs 12.5 times more than keeping or upselling an existing customer. As a result, you need to pay close attention to your net retention rate. 

Net Revenue Retention(NRR) Calculation

 Net revenue retention calculation enables you to know your revenue retention rate. It also helps you to understand the growth trajectory of your company. For instance, if you stopped acquiring new clients tomorrow, how much money would you expect to make next month or quarter?

The net revenue retention measures the recurring income you generate from your customers over a predetermined period. The net revenue retention rate considers the amount of change from one time period to the next. To calculate net revenue retention:

  • First, you add starting annually recurring revenue (ARR) or monthly recurring revenue (MRR) to the change in ARR/ MRR
  • Then divide the result by the starting annually recurring revenue (ARR) or monthly recurring revenue (MRR)

Therefore the formula for calculating net revenue retention is:

 

 

 From the formula above, the starting ARR or MRR and Change in MRR or ARR are the two inputs for calculating net revenue retention. Here, starting MRR/ARR is the MRR or ARR from the previous period of the same length. The period could be the last month, quarter, or year.

On the other hand, change in MRR or ARR refers to the total MRR or ARR change for the group of clients in your starting MRR or ARR metric compared to the current period. The MRR or ARR change could be a change from upsells, downgrades, and churn.

At first glance of the formula, net revenue retention may appear as an easy metric to calculate. Nevertheless, you can interpret the starting MRR or ARR and Change in MRR or ARR in many ways. But each interpretation method depends on the particular context of your company.

 

Increasing Net Revenue Retention (NRR)

Increasing your net revenue retention as a business owner requires you to think beyond new business bookings. It requires you to concentrate on both how to retain current customers and how to generate more revenue from them on an annual basis. 

There are many ways that SaaS companies can increase their net revenue retention, and one of them is by improving overall logo retention. Saas companies can achieve this by investing in customer success, enhancing support experiences, and mapping product roadmaps aligned with customer pain points.

Another way SaaS companies can increase their NRR is by updating their SaaS pricing strategy to better align with the value they offer to customers. They can also incorporate natural upgrades and upsell opportunities at renewal.

Furthermore, examining and modifying go-to-market plans to devote more resources to customer groups with higher net revenue retention rates is another strategy to increase NRR. Additionally, SaaS companies can increase NRR by knowing vital metrics such as Customer Lifetime Value (LTV) and Customer Acquisition Cost (CAC). A deeper insight into these metrics will enable leadership to evaluate product-market fit. In addition, it will help them make more proactive strategic decisions.

Net Revenue Retention (NRR) Versus Gross Revenue Retention (GRR)

Net revenue retention rate (NRR) uses changes in recurring revenue (ARR/MRR) to show revenue growth from your current customer base. Here, the changes are from downgrades, renewals, upsells, and churn. As a result, it helps you understand your company's growth trajectory and overall profitability.

On the other hand, gross revenue retention (GRR) excludes expansion revenue. Instead, it focuses only on downgrades, non-renewals, and revenue churn rate. And since it does not include upsells or expansion, gross retention is a more conservative metric. In addition, it is a better measure of how effectively your business retains revenue from its current customers throughout its lifetime.

For GRR not to include an expansion or upsells also means that it is a more conservative metric and can never go above 100 percent. In contrast, NRR should ideally be well over 100 percent.

How to Calculate Gross Revenue Retention (GRR)

 Gross revenue retention (GRR) is never greater than 100% and is always equal to or less than net revenue retention (NRR). The basic calculation for gross revenue retention is the same as for net revenue retention. 

But, the MRR for each specific customer in the current month cannot be greater than the MRR for that customer from a year ago. Also, unlike NRR, GRR can include downgrades, non-renewals, and revenue churn rate but not upgrades from your current customer base.

 

For instance, let us assume a SaaS company has the following data in its account books:

  • Starting Monthly Recurring Revenue (MRR) = $10,000
  • New Sales = $3,000
  • Expansion of existing customer = $3,000
  • Customer Churn = $ 400
  • Customer Downgrades = $ 400

 

To calculate GRR, the variables to add to our calculation include the following: 

  • Starting MRR = $10,000
  • Customer Churn = $ 400
  • Customer Downgrades = $ 400

 

GRR = (Starting MRR – (Churn MRR + Downgrade MRR)) / Starting MRR

GRR = (10,000 – (400 + 400)) / 10, 000

GRR = (10,000 - 800) /10,000

GRR = 9,200/10,000

GRR = 0.92 = 92%

 

Note: From the formula above, the starting ARR or MRR and Downgrade/churn MRR/ARR are the two inputs for calculating gross revenue retention. Here, starting MRR/ARR is the MRR or ARR from the previous period of the same length. The period could be the last month, quarter, or year.

On the other hand, Downgrade/churn MRR/ARR refers to the total MRR or ARR churn and downgrade amounts from the group of clients in your starting MRR or ARR up until the present period.

The complexity of calculating GRR depends on how you define the inputs. The calculation of NRR and GRR should be easy if your organization has a precise definition of ARR/MRR, upgrades, downgrades, and churn.

The Difficulties of Tracking Revenue Retention Rates

 Tracking retention rates is not particularly difficult on its own. You can easily do this if you know the current value of each client's account and the value of these accounts one month or one year ago.

The challenging part is explaining the full context of this vital metric. Like all SaaS metrics, your revenue retention rate is just one character in a big cast. Thus, it is essential to understand its history and how it interacts with the other cast members.

Consider a scenario where your gross rate is low, but your net revenue retention rate is high. If 50% of your current customers decide to downgrade their subscriptions within the upcoming year, what will this mean for your net retention?

Or, as another illustration, would you rather lose one customer with a subscription worth $150,000 or ten customers with subscriptions worth $10,000 each for a total of $100,000 in lost revenue? The answer may vary depending on your cost of acquiring new customers (CAC) and average customer lifetime value (LTV).

It is vital to look beyond the two players (MRR and ARR) and consider related metrics that provide much-needed context to understand why your client retention rates are what they are. Furthermore, these metrics are derived from different data sources and having access to all of them instantly and without error is where the real difficulty lies.

An Easy Way to Track Your Revenue Retention Rates

 A strategic finance platform makes it easier for you to track your revenue retention rates. These platforms make it easier for you to access your customer retention metrics anytime. They also enable you to enter different groups of customers and time into the equation for various perspectives. Hence, providing a better understanding of your revenue story.

These strategic finance platforms integrate with all the systems (CRM, HRIS, payment, and ERP systems) that house your data. Following the integrations, the platform automatically collates and normalizes relevant data to calculate your net and gross revenue retention and other metrics. With these strategic finance platforms, it is easy to align your calculations with the KPIs of your company and easily present financial insights through vivid representations.

In Conclusion,

A solid comprehension of your net revenue retention rate enables you to understand how your customers feel about you. In addition, it helps you understand the financial health of your business and prospects.

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