What's the difference between gross and net retention?

It’s no secret that the SaaS industry is a competitive and saturated market. Many SaaS companies offer similar products, services, and platforms. One differentiating factor that sets top SaaS organizations apart is their commitment to customer success.

By doubling down on customer success and experience, a company can help create loyal clients. Ultimately, the goal is to turn them into a base of recurring and reliable income, a.k.a. revenue retention. But what does that mean and how do you do that? That’s what we are answering in this blog. In particular, we’re going to cover:

• Net Revenue Retention (NRR)

• Net Revenue Retention vs Net Dollar Retention

• Net Revenue Retention vs Net Dollar Retention

• Gross Revenue Retention (GRR)

• Gross Revenue Retention Vs. Net Revenue Retention

• Other Customer Success Data

• How We At Planhat Can Help Your SaaS Company Leverage Customer Success

What Is NRR In SaaS?

Net revenue retention is an important metric for SaaS companies. Essentially, it measures the amount of money generated (or lost) from existing customers. It gives you a quantitative snapshot of how successful and loyal your existing customers are by looking beyond current revenue and considering things like expansion revenue (which gross revenue retention does not include) or customer churn. We will break down exactly what goes into the NRR and formulas for calculating it in a little bit, but before we do, let’s spend some time briefly discussing net dollar retention (NDR). Don't just take our word for it, see what the experts in this webinar have to say about it.

What Is The Difference Between NRR And NDR?

Net dollar retention and net revenue retention, mean the same thing. The only difference is likely where you live. In the United States and other countries where the dollar is the primary form of currency, NDR is a commonly used term. Net revenue retention is a more common phrase in parts of the world that don’t use the dollar. It’s worth noting that global and multinational companies will often use net revenue retention as a way to effectively communicate with everyone involved.

What Is A Gross Retention Rate?

A gross retention rate, i.e. your gross revenue retention, is similar to net revenue retention. It looks at the recurring revenue from existing customers as well as any lost revenue over the same period of time. What is the difference between net retention and gross retention then? The only difference is that net revenue retention includes any upgrades, upsells, or expansions from your current customers. Gross revenue retention does not. To get a better understanding, let's compare and contrast the GRR and NRR formulas.

How Do You Calculate Gross and Net Revenue Retention?

To calculate either NRR and GRR, you need to have the following data:

• Monthly or Annual Recurring Revenue (MRR or ARR) from existing customer contracts for the period of time you wish to calculate NRR or GRR for

• Expansion Revenue from upsells, cross-sells, or upgrades

• Contractions from customers downgrading or discarding additional features

• Churn from customer turnover

Once you have this information, you simply plug it into the following formulas:

• GRR = (Beginning ARR or MRR -Contractions- Churn) / (Beginning ARR or MRR)

• NRR = (Beginning ARR or MRR + Expansions - Contractions - Churn) / (Beginning ARR or MRR)

Both of these calculations will produce a revenue retention ratio. To convert the ratio to a percentage, simply multiply it by 100. Let’s take a look at an example company to help explain all of this a bit more clearly.

Imagine AML Ventures, a SaaS platform that helps with digital marketing. They have the following data:

• Average monthly revenue per customer = $800

• Number of existing customers = 100

• Amount of expansion revenue for the current month = $300

• Amount of expansion revenue for the year = $5000

• Contraction amount for the current month = $120

• Contraction amount for the entire year = $2000

• Churn for the current month = $50

• Churn for the year = $1000

How do we use that data to calculate either NRR or GRR?

1. To calculate MRR, we multiply $800 x 100 and learn that their MRR is $80,000.

2. We simply multiply this by 12 to find their ARR, which is $960,000.

3. Now we start entering data into the NRR or GRR formula. If we want to calculate revenue retention for the current month, we will use MRR. If we want to calculate it for the year, we use ARR. So to find the monthly NRR of AML Ventures we complete the following calculation:

   A: (80,000 + 300 - 120 - 50) / (80,000) = 1.002 or 100.2 % monthly net revenue retention

4. To find Annual gross revenue retention we use ARR and the following calculation:

   A: (960,000 -2000- 1000) / (960,000) = .9969 or 99.69% annual gross revenue retention.

Planhat… Empowering Customer Success

At Planhat, we believe that customer success teams are the unsung heroes of the SaaS industry. As such, it’s important to equip them with the best tools on the market. Our flexible customer success platform makes it easy to perform at all five stages of the customer journey (and we have the G2 Leader-badges to prove it).

1. Planhat is a customer data platform that let’s you collect all your customer data in one, easily accessible place.

2. Onboard your customers with Planhat as a client onboarding software to create a low Time To Value.

3. You can help your customers maximize your products’ full potential by using Planhat’s customer success platform .

4. Collaborate closely in Planhat’s customer portal for increased retention and a great customer experience.

5. Optimize customer revenue by aligning all customer-facing functions by usings Planhat’s revenue optimization functions.

To learn more about Net Revenue Retention, why it’s important, or how to improve it, check out our thought leadership blog, or head over to our website to schedule a demo today!