Gross Retention vs. Net Retention: Definitions, Formulas, Examples

Gross Retention vs Net Retention

As both gross retention and net retention are crucial metrics in evaluating revenue dynamics in SaaS, it is best to perceive them as complementary rather than opposing metrics. By understanding the fundamentals of your company’s customer retention (GRR) and being able to identify the opportunities for upsells and cross-sells (NRR), you are getting a full overview of your company’s revenue streams and potential. 

In the further exploration of gross retention vs. net retention, we’ll thoroughly explain their definitions, share the given formulas, and provide straightforward examples. Ready to learn how to get an extensive view of how your business is retaining and growing its customer base? Let’s go.

What is Gross Revenue Retention?

The gross retention rate measures the percentage of revenue retained from existing customers without taking expansions and any other additional sales into account. The gross revenue retention rate shows (solely) the company’s ability to maintain its current customers’ revenue over a certain period.

How to Calculate Gross Revenue Retention (GRR)?

To calculate the GRR formula, you’ll again need to get familiar with the revenue from existing customers at the end and start of the given period. The revenue at the end includes all the revenue gained from existing customers, regardless of the initial source, and the one at the start of the period is related to the initial revenue gained from the existing customers. Here’s the gross revenue retention formula:

(GRR)Gross revenue retention formula

Now, to differentiate between Gross Retention vs. Net Retention, let’s learn more about rate interpretation. If the GRR rate is above 100%, that means that the company has retained and potentially expanded its revenue from existing customers. With a rate of 100%, the company was able to retain its existing customer revenue without any gains or losses, and in the case where the rate is under 100%, there was a reduction in revenue due to downgrades or churn.

Gross Revenue Retention Rate Example

Now, the difference between GRR vs. NRR can be seen through a simple example. Let’s say that the company had revenue of $600,000 at the start of the period and $550,000 at the end. The GRR rate is 91.6% in this case. Let’s explain how.

GRR = revenue at the end ($550,000) /revenue at the start ($600,000) x 100 = 91.6%.

This calculation proves that the company had churn or downgrades, as the result is below 100%. This reduction in revenue can only be attributed to these two factors, as the GRR rate only considers the retention aspect without taking additional sales or expansions into account.

What is Net Revenue Retention?

Net Revenue Retention (NRR) stands for the summary of retained, expanded, and contracted revenue over a certain period. It calculates total revenue, including expansion, minus revenue churn.

The net revenue retention rate shows the company’s ability to retain and grow its revenue from existing customers, accounting for all upsells, cross-sells, expansion, and contraction (churn, downgrades).

How to Calculate Net Revenue Retention (NRR)?

Net revenue retention or “net dollar retention,” is extremely important in the SaaS industry as it measures both retention and the company’s ability to keep customers engaged and motivated, and whether its product is constantly updated and ready to meet the needs of different customer segments. Here’s the net revenue retention formula: 

(NRR) Net revenue retention formula

To fully understand net retention vs. gross retention, we first need to know how to interpret both NRR and GRR. If the Net Revenue Retention Rate is above 100%, the company is experiencing net revenue growth from its existing customers. If the NRR is 100%, the revenue flow is stable. For example, the revenue gained from upsells and expansions equals the lost revenue from a downgrade or churn. Finally, if the NRR is below 100%, it indicates a net revenue contraction, i.e., the revenue generated from upsells or expansions didn’t exceed the contraction.

Net Revenue Retention Rate Example

To understand gross vs. net retention, we’ll share with you a simple example. Let’s say a company had revenue of $1.000,000 at the start of the given period (S), including expansion revenue of $50,000 and contraction revenue of $30,000. Now, at the end of the quarter, the revenue was $1.020,000, with a net change in revenue (E) of $20,000. In this case, the net retention rate is 2%  – we simply divide S by E and multiply it by 100 to get the percentage.

 

Gross Retention vs. Net Retention: Which Is More Important to Track?

Companies use gross retention to show them how much revenue they are able to maintain from their current customers without the activities that increase customer value. On the other hand, net retention shows how much revenue you’re gaining when the given revenue-increasing factors are included in the equation. Therefore, you’ll need to track and calculate both metrics to get a bigger picture and understand the efficiency of implemented retention strategies 

Both NRR vs. GRR are crucial metrics to track if you want to evaluate the overall health of SaaS businesses but also gain insights into the dynamics of customer revenue. Still, its importance differs based on the company’s goals, structure, size, and many other factors.

For example, for a SaaS startup, it might be more critical to track gross retention to understand the fundamentals of customer retention without the complexity of expansions. This is the best way to evaluate initial revenue stability.

As the company grows, NRR becomes more important as it provides insights into the company’s ability to expand revenue and drive growth. When creating and implementing customer success strategies where the goal is to maximize revenue from each customer, it is important to track NRR as well. Also, investors would like to get familiar with your NRR rates to evaluate your ability to retain customers and use expansion opportunities.

Therefore, we can conclude that tracking both metrics is important to stay updated about your company’s overall health and performance. In the beginning, you may require fundamental knowledge about your revenue streams and dynamics that comes with GRR assessment, while the situation changes once the company starts to grow and requires a more holistic view that comes with NRR.

Conclusion

Gross retention vs. net retention are two critical metrics in SaaS, where each offers different insights into a company’s revenue oscillations. Gross retention serves as a fundamental metric to evaluate customer retention efforts, while Net Retention provides a full overview of the company’s ability to not only retain customers but also apply effective strategies to get additional revenue from the existing customer base.

Therefore, the given metrics should complement each other to help you get the most nuanced understanding of revenue changes. You can identify areas for improvement more easily when the metrics are not satisfactory and work on creating efficient retention strategies that will align with your customer base’s requirements. Use Akita to centralize all your customer data, perform customer segmentation to understand your audience better, track any metrics you like, and get visual data on their performances.

Frequently Asked Questions

Why is Gross Retention important for SaaS companies?

GRR provides a basic understanding of a SaaS company’s ability to maintain revenue stability from existing customers without depending on upsells, cross-sells, and upgrades. This is how the core retention efforts of the company are assessed.

When should tracking GRR become a priority for a SaaS company?

A company in its earliest stages or one that is primarily interested in understanding and optimizing customer retention efforts, should prioritize tracking GRR. It provides a basic measure before any additional revenue streams are considered.

Can a company track both metrics simultaneously?

Yes, this is the usual case. The given metrics provide complementary insights, and tracking both allows you to gain a comprehensive evaluation of your company’s performance and revenue oscillations.

How do these metrics contribute to strategic decision-making?

This is a great question! By providing insights into the effectiveness of your customer retention campaigns and overall recurring revenue growth potential, the given metrics can serve as a guide in optimizing strategies for expansion, stability, and long-term success.

Related Articles

Best Customer Success Software Best Customer Success Software for Your CS Department in 2024

If you are reading this, you are faced with a real challenge. Either you already manage a customer success function and your existing toolset is not fit for purpose, or you have decided to start a customer success department and want to implement the right software as a solid foundation for your Customer Success Managers […]

Read more
Top Customer Retention Software to Reduce Churn in 2024

Figuring out the right customer retention management software to help manage your Customer Retention goals can be tricky. It really comes down to what your specific goals are, what type of market you serve, the customer data you retain and where that data resides. There are some specific types of tools you should consider. Customer […]

Read more
what is customer success What is Customer Success: Short and Simple Guide

In the world of SaaS, customer churn can feel like a constant threat. But what if there was a secret weapon to turn happy trials into loyal customers? Customer success is what you seek, it’s a strategic approach that goes beyond basic support to ensure your users achieve their goals.

Read more
CSAT vs NPS CSAT vs. NPS: Differences, Formulas, Examples

Customer satisfaction is the holy grail of any SaaS business. But how do you truly measure it? Enter CSAT and NPS, two powerful metrics that can shed light on your customer experience.

Read more
customer success vs sales Customer Success vs. Sales: Differences and Similarities

Understanding the differences between customer success and sales in SaaS is crucial for navigating the intricacies of customer retention, satisfaction, and acquisition. Although both departments participate equally to ensure and maintain the business’ sustainability and growth, they work with different methodologies and goals. While customer success focuses on ensuring customers derive maximum value from the […]

Read more
customer onboarding email templates Steps to Creating a Customer Onboarding Email Template

How you begin your relationship with customers often dictates how long and successful their relationship with your company will be. Given that SaaS companies need to retain customers for a period of time in order to accrue enough subscription revenues to become profitable, delivering valuable onboarding experiences is essential.

Read more
customer success vs account management Customer Success vs Account Management: Important Differences

Understanding the fine nuances between customer success and account management will help you consider them as complementary teams that have the same objective on their agenda.  Both account management and customer success teams work towards improving customer satisfaction and loyalty, but their roles in a SaaS environment are quite distinctive.

Read more
Customer success metrics Key Customer Success Metrics You Should Track as a SaaS Company

Having in mind that customer success directly affects customer satisfaction, retention, and the general health of the business, it has become apparent that maintaining sustained SaaS growth depends on it. Thus, it’s essential to track the relevant customer success metrics in SaaS and evaluate the impact of customer success initiatives.

Read more