Whether you’re looking for rapid growth, funding for the next cycle, or just to understand and improve your revenue retention as a whole, you’ll have to think about metrics like Gross Revenue Retention and Net Revenue Retention while analyzing the KPIs that drive your SaaS forward.
Although they are related, understanding the difference and why they’re important is the first step to optimizing for them -- is one more important than the other? We’re going to go over why you need to track each, what conclusions you can draw while analyzing the trends and how to improve performance on both. Let’s start with some definitions.
Gross Retention Vs Net Retention for SaaS: What’s the Difference?
Picking between gross vs net retention as your primary growth KPI doesn’t have to be a strict case of mutual exclusivity. In SaaS, companies need to be aware of the power of both, and perhaps more importantly, the implications of focusing on one over the other when it comes to monitoring the effects of various elements of customer success.
Before we get into how both of these metrics are important, let’s clear up what they mean.
Gross Retention Rate (GRR)
Gross Revenue Retention, also known as Gross Renewal Rate, is a measure of the percentage of recurring revenue that’s kept (retained) from currently-existing customers within a defined period. This does not include any expansion revenue; that is, anything that comes from upselling to current customers, or anything more than the original subscription.
As it is a percentage of retention, the maximum GRR possible is 100%. Of course, this is likely going to be an unattainable figure due to churn being a fact of life, but the median GRR across all SaaS companies is still around 90%. This figure moves up and down depending on the business model. For example, the benchmark for SaaS companies selling to SMBs is going to be lower than for Enterprise SaaS companies.
For the former, even 80% is a decent benchmark. For Enterprise SaaS, you might want to look at something closer to 90% or 95%, depending on the annual revenue per customer contract, or annual contract value (ACV).
Net Retention Rate (NRR)
Net Revenue Retention (NRR) on the other hand, is a percentage of revenue retained over a given period, but this time it’ll include expansions. This makes it a different metric that offers a more comprehensive view of revenue changes, both positive and negative, as they relate to customer retention.
This time, 100% is a sort of equilibrium point, at which your revenue will stay the same if you don’t get any more customers. This makes it a useful metric of growth, with benchmarks much higher than GRR. Some sources recommend at least a 90% NRR for SMBs, others say that you shouldn’t settle for less than 100%.
Again, Enterprise SaaS will aim higher than SMBs, but the most useful benchmark will relate to your model as much as your market. NRR should indicate how well you’re able to generate revenue from existing customers, not only from the initial sign-up but from ongoing expansion strategies. This is also what makes it a useful metric of profitability, since expanding and retaining accounts leads to lower CAC spend, and thus increased profitability.
As with GRR, your NRR is typically tracked monthly or yearly. Viewing it every month can be a great way to stay on top of the fluctuations in your revenue in both directions, and spot how quickly your revenue increases from upselling. Ultimately, a high NRR (>100%) means you’re doing something right for your customers, since they want to give you more money, and is consequently correlated with a high company growth rate.
Gross Retention vs Net Retention: The Key Differences
It might look like NRR is a more powerful KPI, and in many cases, this is true, since it takes into account more than just a single revenue stream. However, when it comes to measuring churn over longer periods, GRR might be a more suitable choice. As more of a measure of the overall health of the company, GRR will ultimately have implications for NRR anyway, as high churn rates will damage expansion opportunities.
Still, it’s useful to look at both metrics to get a good feel for churn. For example, having a high score in both metrics suggests a healthy outlook, whereas scoring highly in NRR but having a low GRR suggests an unsustainable growth potential. This will become clearer when we discuss the ways to calculate and track both, and as we go into a little more detail about why they’re so important.
Gross Vs Net Retention Calculations and Tracking
So, how do you track these metrics? Let’s start with NRR.
Because NRR represents your ability to retain and expand contracts, it’s calculated using your monthly recurring revenue (MRR) relating to both of these. That’s Starting, Expansion, Churn, and Contraction.
The formula looks like this:
NRR = ((MRR at beginning of period + Expansion MRR) – (Churn MRR + Contraction MRR)) / (MRR at beginning of period) * 100
For example, let’s say you are calculating for the month of May, and you’ve got a starting MRR of $20,000, then you find that upselling brings in another $5000 in revenue but you lose some customers too, at a loss of $2000. Other customers downgraded their accounts, dropping another $500 in contraction over the month.
This would make your NRR for the month:
NRR (May) = ((20000 + 5000) – (2000+500))/20000*100 = 112.5%
An NRR above 100% is a good sign that you’re experiencing growth, but as we discussed, it doesn’t tell the full story. So, let’s now look at how to calculate GRR.
This formula only shows you how well you’re retaining customers, but it will also rely on your MRR from the same month but without any expansion factors. The formula looks like this:
GRR = ((MRR at beginning of period) – (Churn MRR + Contraction MRR)) / (MRR at beginning of period) * 100
Using the same figures, here’s what GRR would look like:
GRR (May) = ((20000) – (2000+500))/20000*100 = 87.5%
As you’d expect, the closer you are to 100% GRR, the better you’re doing, but around 90% is good in most contexts, so this would still be a potentially appealing number to investors.
So, which one paints the better picture? It turns out you need both, and the one your focus the most on will depend on what your current goals are. On top of that, your focus will also likely need to change over time. This can make it tricky to know which one to optimize for as a company.
The Importance of Net Retention Vs Gross Retention and Which to Focus On
In terms of customer success, both metrics are going to be important. Depending on what you’re trying to focus on, either will provide you with different priorities.
Net retention will help you spot how quickly your revenue adjusts to changes such as expansion or cancellations. This makes it a great tool for informing strategic success decisions. We’ll go into how to boost this score at the end of the article, but there are plenty of things you can do to recover if you find yourself falling behind in NRR.
NRR is going to be one of the most powerful KPIs you can follow in regard to your customer base. Simply put, it measures growth in either direction, and it gives you a good look at how you’re increasing your customer lifetime value overall. In this way, it’s great for identifying where and how your customers see value, and as such, how much they’ll be inclined to grow with you over time.
Again, this might sound like it’s all you need as a KPI relating to retention, but there are ways in which GRR should also be considered an advantage over NRR.
To create a complete engine of growth, you need to fuel it with new customers. Of course, it’s possible to increase your revenue from existing clients, and your NRR will show you what’s working in this regard, but this should never be the only focus of your expansion.
As you scale, the market becomes harder to penetrate, and when this happens, it’s tempting to focus on the easier elements of expansion from within. However, too much focus on upsells as you grow can be a dangerous mistake unless you’re already very well-established and huge, as this changes the incentives for your sales teams.
When all focus for revenue retention is put on existing customers it can increase the pressure to harvest too early from within your customer base, decreasing the fitness of your conversions and increasing the potential for friction and the consequent churn. Therefore, balancing net retention vs gross retention is the key to finding the right balance for a healthy trajectory of growth.
So, Which One is More Important?
This will depend on the time and the place. One other key thing to note is that a low GRR will not look good to investors, so optimizing for NRR in the early stages when you’re looking for funding can be a mistake that affects this too. Still, swinging too far the other way means you’ll soon reach a point of diminishing returns as you approach 100% GRR.
But this doesn’t mean that you should focus on either equally. At least, not all the time. Whether you optimize for GRR or NRR predominantly might depend on several factors, and there’s no clear consensus on this.
Commonly though, the best advice leans towards focusing on GRR if you’re a new business. You’ll be looking to improve your product-market fit when you’re still small, and this means chasing that GRR. Without that fit, you’ll be in no position to upsell anyway. Add to this that investors might prioritize GRR and you’ve got a clear message that your gross retention rate is probably more important in the early days.
Then, when you’ve built up your customer base and you have a lot more insight into what your customers need, it can be a good move to switch focus a little more toward NRR. And you should do this without abandoning your efforts to ensure product-market fit, which is where that balance comes in.
Ultimately, these are two distinct metrics to track, and neither should be ignored. The trick is more about finding the right priority at the right time.
Ways to Improve GRR and NRR for your SaaS Business
Whether you’re looking to boost GRR as a startup, or switching your attention to NRR, there are several areas of focus that are useful to both when doing. Adjusting gross vs net retention is a matter of focusing more on the particular metrics that form either, but there are plenty of ways that retention increases will improve both. Here’s a look at four of the most common areas to bump those figures up:
1. Customer Onboarding
Onboarding is critical to a higher GRR and NRR because poor onboarding is often credited as being the #1 cause of customer churn. It makes perfect sense, because if a customer is not able to correctly implement and connect your SaaS to their systems & data while getting their stakeholders up and running, it's highly unlikely they will receive the value from your SaaS they were expecting while being sold.
Thus, an efficient, collaborative and top-notch onboarding experience will set the tone with each client that your team will exceed expectations, continue to deliver value & focuses on the customer experience -- all traits which will pay dividends as your SaaS builds its customer base.
Onboard.io is a good way to organize, automate, and implement your entire onboarding process from one platform. It’s designed to remain efficient as your company grows and offers fully-customized launch plans for each client. This can greatly improve the onboarding process to both increase your gross retention rate and boost your chances of upselling and account expansion, raising your NRR too.
As a company grows quickly, it happens so often that new customers are favored over current ones. Overly-generous promotions to bring in new clients can sometimes make your existing ones feel neglected, and this might be a case where you’re chasing GRR at the expense of NRR.
In the early days of your first clients, you probably had a lot of resources to spend building intimacy and forming long-lasting relationships, and you should be replicating this effect with your customers even as you become more successful. Make sure you continue to ensure customer engagement, deliver value, and drive adoption all the way along the journey and you’ll see higher retention rates across the board.
3. Retention changes at different stages of the customer journey
If you look at your retention metrics across the customer lifecycle, you’ll notice that they’re not uniform at all. There are different motivations at different stages of the customer journey that affect churn, and this is important to keep in mind so that you avoid misplacing resources and designing ineffective retention efforts.
For example, fixing your Time to First Value (TTFV) at onboarding can greatly reduce churn at the early stages, positively affecting your GRR. However, this may not affect the mid-cycle churn rates quite as much. Later on in the journey, it’s important to have incorporated your product so well into their workflow that they don’t want to function without it, and this requires a different set of skills and communication, as well as understanding and working towards the company goals of your customer.
Once you get to this stage, as they scale, they’ll be ready for account expansion too, and this leads to a boost in NRR. Focusing on your retention by the different stages of your customer journey allows you to attack weak points that are causing both churn and contraction, and therefore improves your scores in both metrics.
4. Closing Gaps between Acquisition and Retention
For some, structuring the customer-facing teams in the right way can make a lot of difference. For Tim Kopp, CEO of Terminus, keeping new business, account management, and retention under the same umbrella streamlined all three. This allowed a move to focus more heavily on NRR and GRR but required a significant shift in attitudes across the whole company.
The process involved assigning each customer a dedicated “surround sound” team that would follow them from the start and help with accounts from the moment of sign-up. Handling customers in this ‘franchise’ way can allow CSMs or success teams to have a deeper, longer, and more personal relationship with clients, covering both issues of retention and upselling, and therefore positively impacting both GRR and NRR.
4. Customer Support
Finally, focus on customer support should be an obvious one, but the statistics on the effects of support on customer retention are staggering. 68% of your customers could leave you if they perceive your representatives as indifferent toward them. Yet, support is so commonly lacking in this regard.
Any friction that occurs from the use of your product should be mitigated as quickly as possible, yet commonly, poor experiences with customer support compound the disengagement customers experience as a result.
Support should be a proactive effort to answer questions before they’re asked, so focus on better signposting to self-serve materials and keep them up to date. But be sure to invest enough in the corrective side, too. Investing in the right way and by the right amount can work wonders for your retention metrics.
So, gross retention vs net retention isn’t as much a competition as a collaboration. Both metrics contribute to an overall image of success and neglecting either could spell the end of your growth.
The key things to consider are where and when to focus on either and to make sure they’re both balanced against one another in a way that’s appropriate to the current state of your business. Then, focusing on many of the activities that boost retention should increase both your NRR and GRR.