The gross revenue retention (GRR) rate is the repeat revenue earned from current customers in a specific period. This is particularly important during periods of product downgrading and cancellations. Gross revenue retention (GRR) does not consider revenue from cross-sales/ upsells or downgrades.
GRR is especially important for businesses running as SaaS businesses or any working model where the same customers pay a repeated subscription fee. Recurring revenue and its opposite, revenue churn, are key parameters that require frequent monitoring. Businesses need to know their revenue churn rate and gross and net revenue retention to see how they manage their business. This helps businesses understand how their monthly revenue and growth rates will pan out. It also helps businesses assess how much of their income is from existing and which is from other customers.
Understanding revenue retention
Revenue retention is the revenue earned from the existing customer base billed in the previous month or year for services. What needs to be noticed is that revenue retention calculations can be different from customer retention. However, we cannot deny that customer retention plays a vital role in revenue retention.
For instance, a customer may be continuing with your services but may need to downgrade to a lower-level plan or may need an upgrade to get more service. This means that while your customer retention is the same (assuming you have just one customer), your revenue retention will change.
High revenue retention rates show stakeholders in your business that it can pull repeat business from existing customers and that you are not dropping excessive users over time. Revenue retention also shows for the customers that drop off, and the company can get more to replace them and continue to offer service.
In short, a business with a good product offering, market presence, and a great customer success team will show in its customer and revenue retention rates. Such businesses will have good numbers for their total revenue and low churn rates.
Net revenue retention (NRR)
Net revenue retention (NRR), measures the total revenue retention over a 12-month period. However, that is not all the Net Revenue Retention measures.
Net revenue retention is one of the essential KPIs for defining and determining customer success through the product. If the net retention is low, companies need to look at customer value propositions, revenue growth, and revenue churn and take corrective measures.
*Not to be confused with net dollar retention (NDR), which measures the percentage change of revenue from a customer in their first 12 months of subscription.
Gross revenue retention rate
Gross revenue retention (GRR) is the total revenue earned from a company's current customer base. However, it does not include the gains from service expansions, price rises, cross-sells, and upsells. This means that the GRR shows how satisfied existing customers of service A are satisfied with it and how many have stayed with service A.
The GRR percentage can fall anywhere between 0% and 100%. Businesses with more optimized services should ideally have better GRRs. Remember that the GRR will always be less than 100% and equal to or less than the net revenue retention. Falling GRR is a cause for concern as it means that your business cannot retain its customers, which usually indicates issues with service management, quality, or product satisfaction.
It can also indicate that customer retention declines as customer loyalty and satisfaction fall, and users opt to go elsewhere with their business.
Declining gross revenue retention rates mean that the business will not be able to attract investors for expansion since the business doesn't seem to be sustainable over the long term. High churn rates also mean something wrong with the product offering and feature usage that needs to be corrected to improve GRR and reduce churn.
Gross revenue retention vs. net revenue retention
Amongst the key metrics, both measure differently, and many managers can get confused about which would be better to measure. Net revenue retention is a broad metric that assesses all aspects of customer retention.
This shows how successful the business is in retaining customers. It covers more insights like where cross-sells and upsell plans are working and how many customers are opting for more services and expanding their clientele with your business. This makes the net revenue retention rate a more detailed metric to assess. Net retention is ideal for businesses with a broader product range and cross-selling options to calculate net revenue retention.
However, the gross revenue retention rate is more insightful for in-depth business health as it assesses long-term business health. For instance, a business that started with a base product and maintains that it is its core business.
However, the GRR may show that the core product is losing business while the cross and upsell products are doing better or how well the customers respond to price increases. It also shows what makes the net revenue retention rate much higher than the GRR. This insight may help managers adapt their strategy to retain customers more effectively than if they had relied on just the net revenue retention rate.
Using the GRR allows managers to assess long-term performance, how churn affects business growth, and their monthly recurring revenue. Since churned clients can't be cross-sold or up-sold, there is more clarity about GRR, and investors can be answered with detail about how the business is expanding. This makes GRR a good growth indicator:
For instance, if a business has a net revenue rate of 90% and a gross revenue rate of 70%, investors can tell immediately that the business is established and has a stable growth rate. If this situation were a net revenue rate of 90% and a gross revenue rate of 30%, the situation would change, and investors would probably end up with cold feet!
Using both metrics helps point out which area of the business is not working out, cross-selling or expanded products, or the core product. This means that you can try to work out the problems in your marketing or product mix and develop solutions to improve whichever area of customer or product development is falling behind and improve overall net retention.
These are both just measures of dollar earnings but an insight into whether customers are happy with your products or not.
Calculating the gross revenue retention
For calculating how much revenue the business earned, these values are needed:
- Revenue figures for the start of the period
- Churn value for the period
- Revenue lost because of downgrades
The GRR formula is:
Recurring revenue at the beginning
The gross revenue retention can be calculated at any period, as long as the periods are the same for all the values.
This means that if all customer is billed monthly, and a company has 100 customers, all of whom pay $1000 monthly, the Revenue figures for the start of the period will be ($1000 x 100= $100,000. Now, if during the current month, 5 customers left the service and 3 were downgraded to $500.
GRR in this situation will be [($1000 x 100) - (5x $1000) – (3x$500) ] x 100
($1000 x 100)
= [($100,000)- ($5,000) - ($1500)] x 100
($1000 x 100)
= [93,500] x 100
The gross retention rate of this company is around 93.5%.
Since the net revenue retention formula considers the impact of expansion and upgrades, the net revenue retention formula can yield results above 100% to indicate that the net revenue retention is high due to expansions and upgrades. If you notice the formula components, you can see no impact of upgrades accounted for. This is why the GRR rate can never go above 100%.
In short, NRR reflects the impact of expansion revenue on the business's earnings.
Low GRR indicates that a business is not sustainable in the long term. The high rate of churn implied by a low GRR rate suggests that some areas of the business need to be analyzed closely and changed to improve GRR.
Annual gross retention rate
Figure 1. Annual GRR 2020
Gross revenue retention (GRR) is more about the recurring revenue retained, not the overall revenue gained. Just like the NRR, it can be calculated for any period. However, the GRR calculation does not consider upgrades or cross-sells. It will show how well a company has retained its existing customer base subscriptions. Since upgrades and cross-sells are not regular, assessing retention is a better metric in many cases.
It can seem unnecessary to use the GRR when there is an NRR, but the revenue generated is needed as it doesn't evaluate expansions. It also helps highlight the older customer base that is churning or canceling.
Connecting the gross revenue retention to a business
The gross revenue retention formula can be applied to any business model, but it is specifically useful for companies that offer Software as a Service (SaaS). Such SaaS businesses are usually in the expansion phase and need to justify their business model to potential investors.
This makes the GRR more effective as it measures the long-term health of SaaS companies and their gross retention. It also tries to link customer success teams with performance metrics to improve their performance by determining customer success.
It is useful to know the GRR of the SaaS industry and how your business's gross retention compares to it. According to the market insights that the GRR results show, GRR allows businesses to incorporate changes to the business. It is, however, useful to know how the business fits into the broader industry.
For instance, the average GRR is around 90% for most all SaaS companies. This rate declines to approximately 80% for businesses that target small and medium businesses. While working for Enterprise SaaS, businesses with a GRR of 90% are doing well. Companies with high contract value products are called high ACV (Annual Contract Value) and usually have a GRR of 95%.