SaaS and subscription-based businesses rely on retaining and expanding customer accounts in order to achieve healthy, sustainable revenue growth. Basic revenue metrics like monthly recurring revenue (MRR) and annual recurring revenue (ARR), however, don't give you a clear picture of how customer upgrades, downgrades, and revenue churn are affecting your potential business growth from existing customer accounts.
"Growth at all costs" is no longer the mantra in tech. Today, the winners focus on sustainable growth.
Without a good measure of how your core business is expanding and contracting, your startup could find itself in serious financial trouble you didn't expect, especially in an economic downturn or recession when new business slows down, and sales cycles drag out longer. Just tracking MRR or ARR, you might completely miss issues with revenue churn and contraction when you're experiencing high customer acquisition rates — until your business slows down.
Not only that, but if you need funding at any point, you'll also need evidence of a healthy, happy customer base.
Let's take a look at two of key calculations you can use to measure and quantify sustainable revenue growth for your SaaS startup. These methods will help you identify and address any issues before they impact your company's bottom line.
What is revenue retention?
Revenue retention is the revenue generated from the previous month’s (or year’s) customers. Keep in mind, however, that your revenue retention rate is not necessarily the same as your customer retention rate.
For example, if your SaaS startup retains all of its customers for a year, but they all downgrade to lower plans and spend less compared to the previous year, your revenue retention will be lower, but your customer retention metric will remain the same.
High revenue retention rates indicate to investors that you are driving repeat business from your existing customers, and that you are not losing too many users along the way. It also shows that for any customers you lose, you’re able to acquire more to take their place.
If you have good product-market fit, competitive pricing, and excellent customer service, you should expect healthy numbers when it’s time to measure your churn and retention.
Net Revenue Retention Rate
Net Revenue Retention (NRR) looks at the net revenue left over from your existing customers in a set time period.
Net Revenue Retention takes into account the total revenue minus any revenue churn (caused by departing customers, or customers who have downgraded) plus any revenue expansion from upgrades, cross-sells or upsells. NRR can be calculated at any time but is usually looked at on an annual or monthly basis.
How do you calculate Net Revenue Retention (NRR)?
NRR rate =
MRR (at ARR from the start of the period) + Expansions + Upsells - Churn - Contractions
MRR (or ARR at the start of the period)
Why is NRR important in SaaS?
NRR is perhaps the most fundamental KPI in terms of assessing customer success with your product. If you’re a highly successful company with happy customers, your NRR will most likely exceed 100%. If you’re closer to 0%, it’s time to start taking a serious look at where your customers are churning out and take evasive action.
Your NRR percentage is a broad metric that functions as a snapshot of what your company might look like over time if you don't acquire any new customers. The higher your NRR rate, the more attractive your business is to investors, too.
Gross Revenue Retention Rate
Gross Revenue Retention (GRR) measures the percentage of recurring revenue you retained in a given time period from your existing customer base, not including any benefits from expansion revenue (cross-sells, upsells), or price increases. Gross Revenue Retention is a representation of your success in retaining your existing customers.
How do you calculate Gross Revenue Retention (GRR)?
GRR rate =
MRR - (Churned MRR + Downgraded MRR)
Why is GRR important in SaaS?
The GRR percentage ranges between 0% and 100%. The more optimized your business processes are, and the closer your ratio gets to 100%, the better chance you have of maintaining a healthy company growth rate.
Points to note:
GRR will always be less than 100%
GRR must always be equal to, or less than, your NRR
MRR for each individual customer in the current month must not exceed the MRR for that customer from one year ago
The lower your GRR figures are, the less likely investors are to take an interest in your business. This is because a percentage on the low side indicates that your business isn’t viable over the long term, and your high level of churn indicates that there are fundamental challenges within your business that need addressing.
NRR vs. GRR: Which is the best revenue retention rate to measure?
Between these two metrics, Net Revenue Retention and Gross Revenue Retention, you may wonder which is the best revenue retention rate to regularly measure.
NRR is a broad measurement that looks at the wider aspects of your revenue retention. As this metric contains more information, it naturally seems like the best option for businesses to work with. If your growth rate is high, this might indeed be the best solution.
However, GRR is advantageous in that it measures the longer term health of your business. Without the expansion sales factored in with NRR, you can see how your churn is affecting your ability to grow – as you can never make those extra cross-sells and upsells from churned clients.
For the most clarity about your churn, it’s useful to look at both of these revenue retention calculations to get a full and balanced picture of your business health. It will also ensure that you have the numbers you need when it’s time to find investors or apply for funding.
For example, if your business has NRR of 120% and GRR of 90%, investors can see at a glance that you’re financially stable with steady growth. If your NRR is the same 120% with GRR of only 40%, investors will look on this less favorably, as these figures indicate that your growth is poor and less predictable within your existing customer base.
Churn isn’t just a calculation for measuring dollar values. It’s an important metric that can be analyzed to give you a clear picture of your customers’ journeys and successes with your product.
Using Net Revenue Retention and Gross Revenue Retention rates as churn indicators can help you pinpoint what’s not working in your business. This means you can plug any leaks in your core product and support experiences to improve your user journeys and increase your revenue retention.