Net revenue retention (NRR) and gross revenue retention (GRR) are two important metrics. NRR reflects your ability to retain and expand the monthly spend of customers, while GRR indicates only your ability to retain customers.
An easy way to look at it is like this:
NRR: How well do you sell to current customers?
GRR: How well do you keep your customers happy?
NRR and GRR are important secondary metrics for any SaaS enterprise that brings in money through a subscription revenue model.
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In this article, I will explain NRR and GRR, present their formulas, provide examples of NRR and GRR calculations, and the implications of an NRR focus versus GRR focus.
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What is revenue retention?
Revenue retention is the amount of revenue you have this period because it was also there last period.
For example, if a customer signs up for your service in March and stays in April, then the amount they spend in April is part of your retained revenue.
While I mention a customer here, note that revenue retention and customer retention are not the same thing.
If you have 20 customers spending $30/month, then your customer retention is 20, while your revenue retention is 20 × $30 = $600.
For example, if you have the same 20 customers paying $30/month in March, but in April you have 15 customers with 10 paying $30/month and 5 now paying $75/month, then your customer retention has decreased to 18, while your revenue retention has increased to $30 × 10 + 5 × $75 = $675.
In this simple explanation, I have presented the revenue and customer retention as numbers, but usually NRR and GRR are presented as a percentage, i.e. the rate of change from one month to the next.
Let’s look at the math behind net revenue retention, gross retention revenue, and customer retention.
Net revenue retention rate formula
As mentioned in the introduction, NRR is an indication of your company’s ability to retain and expand contracts. In this sense, it is similar to the SaaS quick ratio, which is also calculated using the different influences on MRR (monthly recurring revenue).
Whereas the quick ratio includes all of the following components, NRR omits New MRR and Reactivation MRR:
New MRR is the additional MRR from new customers.
Expansion MRR is the additional MRR from existing customers (also known as “upgrade MRR”).
Churned MRR is the MRR lost from cancellations.
Reactivation MRR is the additional MRR from churned customers who have reactivated their account.
Contraction MRR is the MRR lost from existing customers due to downgrades.
Let’s look at the NRR formula:
NRR = ((MRR at Start of Month + Expansion MRR) – (Churn MRR + Contraction MRR)) ÷ (MRR Start of Month) × 100%
For example, you start March with an MRR of $50,000. Some of your customers upgrade adding $10,000 in revenue. Some customers churn leading to a loss of $3,000 in revenue, while other customers downgrade leading to $2,000 in contractions.
In this case, NRR = ((50,000 + 10,000) – (3,000 + 2,000)) ÷ 50,000 × 100% = 110%.
An NRR above 110% is an indication that you are experiencing MRR growth from current customers, which is great!
Gross revenue retention rate formula
Unlike NRR, GRR only shows your ability to retain customers. Hence, in addition to New MRR and Reactivation MRR, GRR also omits Expansion MRR.
Let’s look at the equation:
GRR = ((MRR at Start of Month) – (Churn MRR + Contraction MRR)) ÷ (MRR Start of Month) × 100%
Let’s use the same example as above. Omitting the $10,000 in expansions, GRR = ((50,000) – (3,000 + 2,000)) ÷ 50,000 × 100% = 90%.
Since GRR is capped at 100% or your NRR, whichever is lower, a GRR of 90% is pretty good. The closer it is to 100%, the better.
Customer retention rate formula
The customer retention rate is sometimes calculated instead of GRR because it is much simpler and provides a similar snapshot of your growth trajectory.
Let’s look at the formula:
Customer retention rate = (1 – (Customers Lost/Customers at the Start of the Period)) × 100%
Let’s take the same example again. Instead of $50,000 of MRR, consider there are 1,000 customers each paying $50/month. Then, 100 customers ($5000/$50) decide to leave the platform at the end of the month.
Here, the customer retention rate is (1 – (100/1,000) × 100% = 90%.
While this example is meant to be straightforward to see why customer retention rate can replace GRR, if your customers are paying different amounts, then there can be a variance between the numbers.
For example, if your high-ticket customers are more likely to churn, then your customer retention rate will be better than your GRR. Conversely, if your lower-tier customers are more likely to churn, then your GRR will be better than your customer retention rate.
Use Baremetrics to monitor your MRR, NRR, and GRR
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It can be difficult to calculate all the different types of MRR to get your NRR and GRR. That’s why you should use Baremetrics to get the most out of your data.
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Which is the best revenue retention rate to measure?
I’m going to be very predictable here and answer the question with “both”. NRR and GRR tell you different things about your company.
So, what questions are answered by NRR and GRR?
- NRR: How well do you sell to current customers?
- GRR: How well do you keep your customers happy?
NRR is a good indicator about whether you are keeping your customers buying more. This is usually done by continuing to build new services and upselling to your clients by getting them to add each new tool to their service package.
GRR tells you how satisfied customers are with your product as well as your customer service. If your clients are satisfied, then they won’t churn and your GRR will remain close to 100%.
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Frequently asked questions about revenue retention
NRR, GRR, and customer retention rate can be confusing, which is why I put together this FAQ based on questions I’ve heard before.
What is a good NRR benchmark?
For your SaaS business to keep growing, you should aim for an NRR above 100%. While the average SaaS business does hover around 100%, pushing for a higher rate is a good way to improve your MRR.
This is because it can be easier to get customers that already love and value your service to spend more than to get new clients to sign up.
What does it mean when NRR is over 100%?
An NRR that is over 100% means that your revenue increase from upsells is greater than your revenue decrease from churn.
This is a good thing and is an indicator that your company is seeing revenue growth independent of new customer acquisition.
What is the maximum value of GRR?
GRR is always between 0% and 100%. In addition, your GRR is always at most equal to your NRR. If either of these is not true, then you have made a mistake and need to recalculate your GRR and/or NRR.
What’s the difference between NRR and GRR?
The only difference between NRR and GRR is that NRR includes Expansion MRR while GRR does not. In other words, NRR includes upgrades while GRR does not.
Why should you track NRR?
NRR, similar to the quick ratio, is a great metric for a direct view into the growth of your revenue stream.
Tracking NRR over time will give you a better understanding of the stability of your income stream.
Different growth metrics tell you different things about your company.
The net revenue retention rate tells you how much your revenue from current customers is growing or shrinking from month to month.
The gross retention rate and customer retention rate tells you how well you are keeping clients signed up for your service from month to month.
Since a business is a complex entity operating in a dynamic world, you need to track many metrics to have a clear picture of your company’s financial health.
That’s where Baremetrics comes in.
Baremetrics is a business metrics tool that provides 26 metrics about your business, such as MRR, ARR, LTV, total customers, and more.
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