Gross revenue retention vs net revenue retention

For SaaS companies looking for real insights into their current success and future possibilities, determining the right metrics to track can be difficult. Customer success leaders looking to build dynamic dashboards truly have more metrics to choose from than they have room for! That being said, among the most important and versatile metrics for understanding customer loyalty is net retention rate (NRR), or net dollar retention as it’s sometimes called, as well as related metrics such as gross revenue retention (GRR). In this article, we’re going to examine NRR and these related metrics, as well as why they’re so crucial for SaaS companies to track (and understand). Let’s just jump right in…

What Is NRR in Customer Success?

Net retention rate, a SaaS metric that helps companies better understand customer churn, basically calculates how much of an organization’s recurring revenue comes from their existing customers. It can be expressed as either an amount or a percentage. In addition to raw retention numbers, NRR also considers the income that originates from upgrades and cross-sells—as well as negative factors such as downgrades and cancellations.

Why Is NRR So Important for SaaS Companies?

Simply put, net revenue retention (NRR) is among the most important indicators of a SaaS company’s overall financial health. NRR helps to quantify the value of current, ongoing customer relationships. It can also help inform strategies for improving customer retention through better understanding—and meeting—customers’ expectations for your business.

Let’s get into the nitty-gritty of how this key performance indicator (KPI) is calculated.

How to Calculate Net Revenue Retention

In order to calculate NRR, you’ll need a few pieces of information:

• ARR, MRR, or QRR: Recurring revenue total you started the year, month, or quarter with.

  – ARR = Annual Net Revenue Retention

  – MRR = Monthly Net Revenue Retention

  – QRR = Quarterly Net Revenue Retention

• Positive revenue total from add-ons and upsells.

• Negative revenue total from customers who choose to either cancel or not renew, as well as downgrades.

Once you have these figures, you can calculate NRR. It can be calculated as either an amount or a percentage.

Net Revenue Retention Formula

• NRR as an amount: Revenue total (ARR, MRR, or QRR) + Upsells - Losses

• NRR as a percentage : Calculate NRR as an amount, and then divide that number by the (ARR, MRR or QRR) total

Net Revenue Retention: Example Calculation

Let’s say you want to calculate quarterly NRR as a percentage. The business’s total revenue was $100,000 at the start of the quarter. By the end of the quarter, the customer success team has:

• Sold $20,000 worth of add-ons and upsells.

• Lost $10,000 to customer accounts that either canceled or opted not to renew.

Using the formula above, then, here’s what the calculation looks like:

• $100,000 + $20,000 - $10,000 = $110,000

To convert this to a percentage rather than an amount, we’d simply divide $110,000 by $100,000. This comes out to 1.1, which we can multiply by 100 to create a whole-number percentage. In this case, the NRR comes out to 110%. In a little bit, we’ll explore what a “good” NRR looks like.

What Is the Difference Between Gross and Net Revenue Retention?

The key difference is that while NRR and GRR both quantify churn and its impact on revenue, GRR doesn’t account for revenue-increasing activities (like upsells). This is easily identified when we look at each metric’s formula:

• Net revenue retention (NRR): Revenue total (ARR, MRR, or QRR) + Upsells - Losses.

• Gross revenue retention (GRR): Revenue total (ARR, MRR, or QRR) - Losses

So, while our NRR example came out to 110%, here’s how we’d calculate GRR with the same sample numbers:

• $100,000 - $10,000 = $90,000 (or 90%)

Finally, it’s worth noting that since add-ons and upsells aren’t considered in GRR, it is impossible to have a GRR percentage that exceeds 100%.

What Is Net Dollar Retention? Is Net Dollar Retention the Same as Net Revenue Retention?

In the SaaS world, the phrases “net dollar retention” (NDR) and “net revenue retention” are often used interchangeably. Regardless of what you choose to call it, the NRR/NDR formula quantifies changes in recurring revenue over a chosen time period. As mentioned earlier, NRR is considered to be especially important for SaaS companies.

So, just what is the difference between NRR and NDR? While these two metrics are essentially the same for customer success teams at SaaS companies, on a technical level, NDR potentially involves one additional step—converting revenue figures to U.S. dollars.

What Is a Good Net Revenue Retention Rate?

Generally, and from a common-sense standpoint, any NRR that exceeds 100% is considered excellent, as it would indicate that a company is growing at a rate that could theoretically continue without the need to keep their foot on the customer acquisition pedal.

Victor Cheng, a former McKinsey consultant and author of Extreme Revenue Growth: Secrets to Growing Your Sales from $1 Million to $25 Million in Any Industry, suggests that net revenue retention benchmarks may vary for B2B companies, depending on the companies they work to attract and retain. For example, a SaaS company focused on working with Fortune 500 companies should work toward an NRR of 110% or more. A good NRR for companies focused on small business clients, on the other hand, would be 90% or above.

What Is a Good Gross Retention Rate?

Since GRR can never exceed 100%, the benchmarks for what constitutes a good GRR must be adjusted. As a metric, GRR is less precise and less actionable than NRR, so a good GRR either sustains previous success or grows it. In other words, GRR is best considered as a contextual metric, gauging growth or decline in relation to previous months, quarters, or years—and/or vs. your key competitors or industry peers.

How Do Companies Improve Their NRR?

Next, let’s briefly explore some practical tips for making a good net revenue retention rate great:

Know Where You Stand

Whether you choose to calculate NRR on a monthly, quarterly, or annual basis, it’s important to make sure there’s a common understanding around how it will be calculated within the organization. Whenever possible, set benchmarks for NRR within the company. So, what does “good NRR” look like for your company? You might start by benchmarking past and current performance, so you can monitor any improvement or growth as it occurs.

Consider Complementary Metrics

Measuring and monitoring net revenue retention provides important information for organizational leaders and key stakeholders, but it doesn’t tell the whole story on its own. Sure, knowing that your customer base is steady or growing is definitely a positive, but without context it can be difficult to understand what factors contribute the most to your retention rates, or the story behind the NRR figure.

Some key performance indicators that help to contextualize NRR include the following:

• Customer Health Score: Measures how satisfied customers are with the company’s offerings, including insight into how (and how often) they use different features or services, how their account has grown (through upgrades) over time, any quantifiable support tickets or product feedback, and more. Monitoring customer health scores can help businesses to better understand trends in the data, and how they ultimately impact NRR.

• Customer Acquisition Cost (CAC): Measures the total amount spent to convert a lead into a customer. A high CAC can lower your NRR, since it increases the amount you have to subtract from the monthly, quarterly, or annual revenue figures. It’s worth noting that a high CAC does not always mean NRR is going to decrease. If the money spent toward customer acquisition ultimately creates better, longer relationships and increased opportunities to up- or cross-sell, then it may ultimately prove beneficial.

• Customer Lifetime Value (CLV): Measures the total monetary value of a SaaS customer over the life of their subscription. If CAC is high—but CLV is also high, as a result—then NRR should increase (essentially demonstrating the ROI of customer acquisition efforts).

• Logo Retention, Logos Added: Measures the number of customers retained or added over a given period. More logos means more customers—and more customers likely means higher gross and net revenue retention figures.

What Is Net Retention Rate?

Often, when someone uses the phrase “net retention rate”, they’re actually referring to NRR. On the other hand, there is a distinction between NRR and another, similarly-named concept—net customer retention. Instead of focusing on revenue figures, net customer retention (also sometimes known as net logo retention) refers to a SaaS company’s customer base in terms of number of active, paying subscribers.

The basic net retention rate formula is simple, with variation based on whether or not to include new customers in the formula. If you include them, you’ll be calculating a net retention rate; if you don’t include them, you’re calculating gross retention rate.

• Net Retention Rate: Total number of customers at the beginning of the month, quarter, or year (plus) total number of new customers signed, (minus) total number of customers who canceled, or did not renew.

• Gross Retention Rate: Total number of customers at the beginning of the month, quarter, or year (minus) total number of customers who canceled, or did not renew.

To calculate the gross or net customer retention rate as a percentage, simply divide the resulting figure by the total number of customers at the start of the period and then multiply by 100.

Let’s say you started the quarter with 200 customers. Over the course of the quarter, you added 30 new customers while 20 customers churned. The gross retention rate would be 90%:

• 200 - 20 = 180

  – 180 / 200 = .9 (x 100 = 90%)

Using those same figures, then, the net retention rate would be 105%:

• (200 + 30) - 20 = 210

  – 210/200 = 1.05 (x100 = 105%)

Planhat makes it easy to track these metrics and more within a single intuitive application. We provide companies with a flexible customer platform so sales leaders, customer success managers, and other stakeholders can track their customer accounts within a single interface.

Fine-Tune the Customer Experience

With Planhat, monitoring key account information—and converting it into actionable insights—is easy. Not only can you create dashboards and reports that aggregate data across departmental silos and connect information from sales, marketing, and customer success teams for a 360-degree view into the data. Additional benefits include:

• Churn Prevention: Track and visualize customer usage data in real-time, understand changes in their engagement, and take timely actions in response to negative usage.

• Customer Health: Planhat’s Health Scores update in real-time, and can be used to identify risks and opportunities and send automated alerts for timely action in response.

• Customer Success Analytics: Without the right data to power key decisions, fostering sustainable growth can be difficult, feeling like a potentially-costly game of trial and error. It doesn’t have to be that way! Planhat’s robust Customer Success Analytics provides a foundation for increasing customer understanding. This way, customer success teams can anticipate customer needs, cater to their preferences, and make sure their offerings are providing the best possible experience.

How Can Planhat Increase Your NRR?

These are just a few examples of the insights-driven features of our customer success platform. Visit our website to read customer stories, in order to better understand how Planhat helps companies who want to:

• Better understand what deights your customers — and maximize those opportunities to build better B2B relationships.

• Grow revenue and prevent churn — through a better, insights-driven customer journey.

• Become a data-driven, customer-centric powerhouse — using timely and accurate data to keep customers at the center of every strategy you develop.

Learn more about why G2 recently named us a “Leader” in not one, but five different categories, spanning the entire customer journey. You can also schedule a demo on our homepage to see the platform for yourself! Or, check out the recording from our recent webinar, where we discuss Net Revenue Retention in CS and beyond. A better customer journey starts now.