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What’s the Difference between Gross Retention vs Net Retention?

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Gross Retention vs Net Retention

Generating revenues is the ultimate goal of every business. Therefore, identifying and implementing the right metrics to evaluate the financial position of a company is vital. Through these metrics, businesses can determine where they stand financially. Using the correct measurement techniques, companies can predict future growth and develop strategies to achieve that growth through various channels. Whether it is a contactless payment companies apps developer or a SaaS firm, revenue retention metrics can be really helpful for any business.

What Is Revenue Retention?

Revenue retention is the percentage of a company’s revenue that is retained over a certaperiodiod from existing customers. Usually, it is measured monthly to align with the company’s monthly recurring revenue. A high revenue retention value depicts satisfied customers and investors. It is a key metric for a SaaS business and other tech firms. As these companies rely on recurring business from current customers, profitability depends on consistently retaining and selling to current customers.

When a company can sell to existing customers continually, it can bring down its customer acquisition cost (CAC) which subsequently affects the company’s growth. Furthermore, understanding, monitoring, and working hard to increase revenue retention indicates that the company values its customers.

Revenue retention can be broken down into two major categories:

  1. Gross Retention
  2. Net Retention
  1. Gross Retention

Also known as Gross Revenue Retention (GRR), Gross Retention focuses on revenue retention. The GRR determines how much of the monthly recurring revenue (MRR) can the company retain after subtracting the churn or downgrades. It does not take into account any expansion revenues such as upgrades or cross-selling but only focuses on specifically what a certain offer’s retention is. GRR can be measured monthly, quarterly, or annually depending on the company’s selling strategy and subscription term.

The formula to calculate the GRR percentage is as under:

GRR = (Total Revenue – Revenue Churn)/ Total Revenue x 100

To understand better, consider a business that makes a monthly revenue of USD 100,000 with a revenue churn of USD 10,000. The GRR will be calculated as:

GRR = (100,000 – 10,000)/ 100,000 x 100

GRR = 90%

  1. Net Retention

Net Retention or Net Retention Revenue (NRR) reflects the business’s ability to retain and expand sales to existing customers. In simpler words, it represents the percentage that a company can retain from its current customers within a given time. It is a significant metric to evaluate the financial position of the company as it depicts the loyalty of current customers by evaluating how many renew their subscriptions and how many are downgrading or canceling them.

The information collected from NRR helps expand a company’s customer base. As the growth rate becomes predictable, the investors also can gain an idea of the company’s financial performance and act accordingly.

The following formula can be used to calculate NRR:

NRR = (Total Revenue + Revenue Expansion – Revenue Churn) / (Total Revenue) x 100

For instance, if a company is making a monthly revenue of USD 100,000 with a churn of USD 10,000 and revenue expansion of USD 20,000, NRR will be calculated as:

NRR = (100,000 + 20,000 – 10,000) / (100,000) x 100

NRR = 110%

Anything above 100% is considered a good NRR as it means that the company’s revenue expansion was much higher than the revenue churn.

Difference Between Gross Retention and Net Retention

Both NRR and GRR can be used to track the changes in a business’s profits and client base. These metrics are used by a business to better understand its financial performance. The choice of one over another can affect business strategies. The only differentiating factor between the two is that GRR doesn’t consider the expansion revenue in the calculation and doesn’t show the effect of upsells or cross-sells on the revenue retention rate. However, NRR takes into account these upsells and cross-sells in its calculation.

Gross Revenue Retention Rate does not include revenue growth, upsells, and modifications, therefore it can be used for long-term planning about the security and stability of the company’s existing income sources. It determines the content customers who are also loyal to the company. This rate can be helpful to see if current marketing strategies have been successful and how well the customer support department has been doing.  Moreover, this data can also be used by the company’s sales team in new customer acquisition by identifying the characteristics of the ideal customers.

Net Retention Rate, on the other hand, involves upsells and cross-sells, hence it can be used to help a business understand the dynamics of current customer growth initiatives. It is a better metric to determine growth potential as it can assist the company in evaluating churn as well as business expansion. For instance, if a substantial amount of customers are upgrading, this information can help a company identify when it should market these offers to existing customers to maximize profits.

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