In the SaaS industry, Customer Retention is the lifeblood of any business. The metric is critical as many venture capitalists look at it and decide whether to fund the business or not. Such an important one, isn’t it? Yes, but why?
It is because the new customer pays only around 10-15% of the potential revenue that s/he can generate. The rest is uncertain. If you can prove the value that your product provides, then you can rest assured of the remaining revenue. Essentially the future revenue is dependent on how well you can retain your customers.
In this blog, you’ll learn about-
* Gross Revenue (GR),
* Net Revenue (NR),
* Difference between Gross Retention and Net Retention.
* Gross Revenue Retention (GRR) and Net Revenue Retention (NRR).
* Steps to be taken to maximize both GRR and NRR
What are Gross Revenue and Net Revenue?
When you sell your product, the revenue received is Gross Revenue (oversimplified definition). Gross Revenue is the amount of money you get after selling the product whereas Net Revenue is the amount of money the business brings in from sales after deducting the expenses.
Gross Revenue – Expense = Net Revenue
Difference between Gross Retention and Net Retention
The only difference between these two retention rates is that Gross Retention doesn’t take into account the expansion revenue while it’s calculated. It basically eliminates any kind of impact that the upsells, cross-sells, etc can have on the retention. Net Retention considers the impact that the upsells or any expansion that happened on the retention capability of the business. To understand the difference thoroughly, it’s important to know the concept clearly.
Gross Revenue Retention and Net Revenue Retention
Gross Revenue Retention (GRR) is a metric that measures your ability to retain customers for the longest time possible. Net Revenue Retention (NRR) also suggests the same. However, NRR also considers the upgrades or the expansion that happened during the specific period of time.
In a Saas business, an NRR rate >100% is a good growth Indicator. For SaaS companies targeting SMB markets, anything over 90% is good NRR whereas, for Enterprise SaaS, an NRR >=125% is considered a good measure.
Check out the Guide For VP Of Customer Success (CS) To Achieve 125% ARR!. This blog details the nuances that you need to understand if you’d want to achieve a 125% ARR.
The formula to calculate GRR and NRR is depicted as follows:
GRR= [(Revenue from renewals – Revenue lost due to churn and downgrades) / MRR at the beginning of the month)]
NRR= [(Revenue from renewals + Revenue from upgrades– Revenue lost due to churn and downgrades) / MRR at the beginning of the month]
For example, if your MRR at the beginning of the month was $10,000, the upgrades were to the tune of $1000, your MRR from renewals at the end of the month was $9500, you lost $250 due to churn and lost another $250 due to downgrades. Replacing these numbers into the formula would give:
GRR= [(9500-250-250) / 10000)] = 90%
NRR= [(9500-250-250+1000) / 10000)] = 100%
As you can see, GRR is not bothered about upgrades, whereas NRR takes them into account as well.
Steps to maximize Gross Revenue Retention and Net Revenue Retention
For Gross Revenue Retention
Invest heavily in Customer Success. You can’t assume to receive a recurring stream of revenue if you’re not proactive in your approach towards customers. It requires commitment towards building a healthy relationship, value realization, and exceptional customer experience.
Onboarding is the stage to make your first and possibly the best impression. A stage, at which on average 75% of SaaS businesses witness churn, is an opportunity for you to be in the remaining 25% category.
Create processes across different functional departments that ensure customer success. Alignment between internal teams can go a long way in providing that extraordinary customer experience.
For Net Revenue Retention
Track your biggest customers closely. It ensures faster product adoption there and consequently an early time to value. It maximizes your revenue from that segment.
Data is your friend. Never shy away from analyzing data a bit deeper. You’ll glean insights about product adoption, utilization, health scores, etc. that you’d have never figured out by yourself.
Optimize product engagement. Sending out alerts whenever a new feature is released, providing training/tutorials, etc assists in ensuring consistent engagement between the user and the product.
Provide a bonus/variable component in CSM compensation. This motivates the customer success managers to own up to the responsibilities/goals of their department.
Final Thoughts on Revenue Retention
Increasing recurring revenue through retaining customers is your most important goal. If you’re a SaaS business, NRR/GRR must be your north star metric. These are important as they let you know about the customer journeys. It can clearly indicate the stages at which upselling/expansion can happen.
It can help you identify what is and what is not working for your business. Plugging any leaks to improve your revenue retention is the ultimate goal that these retention metrics help with.