Revenue retention is a very important metric for any business since it will help you draw insights into the business’ overall profitability. When you have a high revenue retention rate, it’s a win-win situation - happy customers and attracted investors. There are two types of revenue retention: net revenue retention (which we discussed before) and gross revenue retention. In this article, we will focus on gross revenue retention. We will learn how to calculate this metric and how to connect it to your business.
What is Gross Revenue Retention
Gross revenue retention (GRR) is the percentage of your recurring revenue that is retained in a given period of time. Unlike net revenue retention (NRR), this focuses only on your existing recurring revenue and churns/downgrades but does not include expansion.
Keep in mind that gross revenue retention is different from customer retention. Suppose your business retains its clients for a month, however, some of them downgrade to lower plans and spend less compared to the previous month. This will make your gross revenue retention lower, but your customer retention metric will still be the same.
How to Calculate GRR
In order to calculate the gross revenue retention rate, you need the following:
- Revenue at the beginning of the period
- Amount lost due to churn
- Amount lost due to downgrades
The formula for the GRR is
GRR = [(Recurring revenue at the beginning - Amount lost due to churn - Amount lost due to downgrade)/Recurring revenue at the beginning] x 100
GRR can be assessed for various time-periods (i.e. day, week, month, year). Make sure that you are consistent with the time periods that you are using. For example, a company has 200 customers, each paying $1500 per month. The recurring revenue at the beginning (of the month, in this case) is 200 X $1500 = $30000. Within the month, 2 customers canceled and 3 customers downgrade by $500 each. Thus, the GRR is
GRR = (200x$1500) - (2x $1500) - (3x$500)(200x$1500)98.5%
The gross retention rate of your business is approximately 98.5%.
The above formula tells us the recurring revenue your business retains in each time period after subtracting the effects of churns and downgrades, but not the effects of upgrades. Unlike Net Revenue Retention (NRR) which can reach above 100% due to expansion, the maximum value for GRR is only 100%. Moreover, lower GRR implies that your business is not feasible in the long term. The higher rates of churns/downgrades means that there are still parts of your business that need to be addressed.
How to Connect Gross Revenue Retention to your Business
The gross revenue retention formula is applicable to any business model, but this is more important to Software as a Service (SaaS) companies. If you’re a growing SaaS organization, you want to attract more investors. The one key metric that investors look for is the GRR because it measures the longer term health of your business.
As you begin monitoring your GRR, you will find or think of additional insights specific to your strategy. Of course, it will be helpful if you fully understand the relationship of your GRR to a broader industry. To help you know what target you should set, here are the benchmarks for good gross revenue retention rate:
- Median GRR is approximately 90% across all Software as a Service (SaaS) companies.
- For those selling into small and medium businesses, a good GRR is 80%.
- For Enterprise Saas, 90% is a good GRR.
- For very high Annual Contract Value (ACV) products, you should benchmark your GRR up to 95%.
As a key takeaway, having a good GRR means lesser customers’ churns and downgrades. Although you are focusing on building your products to have a greater value, at times you also need to invest in customer success!