Keeping a steady customer base is vital for any SaaS Business. Any C-Level will tell you that churn, the number of customers who stop using a company's product or service over a certain period, is their worst enemy.
Customer retention is the aim of any SaaS company, as high retention rates usually signal that customers are happy with the product or service. Knowing about your company's retention rate is thus crucial to understanding how your company is performing.
Retention goes beyond measuring the number of customers who keep using your company's product. You can unlock more detailed insights into your company's success with gross revenue retention (GRR) and net revenue retention (NRR).
In this article, we will take a close look at both GRR and NRR and explain what these metrics mean for your business.
What does retention say about your business?
Retention is a ratio that is used to determine how many customers remain loyal to your product or service over a given period.
During this period, your company will obviously lose some customers and attract new ones. The customer retention rate (CRR) measures loyalty during this period whilst excluding new subscriptions.
You can calculate CRR like this:
CRR = L-ND * 100
D is the number of customers at the end of the period (let’s say $120);N is the number of new customers during the period (let’s say $40);L is the number of customers at the end of the period (let’s say $90).
CRR = 90 - 40120 * 100= 41.6%
Retention is crucial because it shows how satisfied your customers are with your product. This means that they are choosing to continue using your product over your competitors.
This metric is crucial to indicate your company’s success in a given market. Logically, companies with high retention rates (over 80%) have been shown to grow much faster than those with low rates.
Net revenue retention (NRR)
What is net revenue retention?
This key performance indicator (KPI) assesses the additional recurring revenue produced by current customers within a specified timeframe. It charts variations in Net Revenue Retention resulting from expansion, contraction, and churn during that period in comparison to the initial Net Revenue Retention.
Notably, this ratio disregards revenue stemming from new subscriptions but incorporates the effects of attrition and contraction on Monthly Recurring Revenue.
To explore how net revenue retention works, let’s take the example of “Bubble”, a fictitious SaaS company that specializes in providing daily philosophical content to its users:
How do you calculate net revenue retention?
Let’s calculate Bubble’s net revenue retention:
Bubble’s starting MRR is $83,333, with 10 customers each contributing $8,333 in MRR.
During the studied period, some of Bubble’s customers decided to expand their subscriptions:
- Customer A: Upgrades and contributes an additional $417.
- Customer B: Upgrades and contributes an additional $583.
- Customer C: Upgrades and contributes an additional $250.
Total Expansion Revenue: $417 + $583 + $250 = $1,250
One customer decided not to renew their subscription, resulting in a churn of $10,000.
Finally, one customer decided to downgrade their subscription, resulting in a contraction of $833.
Now, let's calculate the Net Revenue Retention:
NRR = Starting MRR + expansions - churn - contractionsStarting MRR * 100
NRR = 83,333 + 1,250 - 10,000 - 83383,333 * 100
NRR = 73,75083,333 * 100
NRR = 88.5%
In this case, the net revenue retention of Bubble is approximately 88.5% based on Monthly Recurring Revenue.
What is net revenue retention useful for?
SaaS businesses that rely on recurring revenues understand the significance of maximizing revenue growth while minimizing customer acquisition costs (CAC).
Fostering long-term customer loyalty is one way to increase LTV. Effectively reducing churn not only minimizes spending to replace lost customers but also ensures sustained MRR.
Retention, particularly fluctuations in this rate, serves as a key indicator of customer loyalty. It gauges your company’s capacity to upsell and cross-sell to existing customers, fostering growth at a more economical rate through expansion.
This provides insights into how satisfied your customers are. If the KPI is low, this could stem from product issues or possibly from targeting an inappropriate clientele.
By consistently monitoring retention, you can also assess whether your marketing is maintaining or boosting MRR, without you having to acquire new customers.
What is the best net revenue retention?
In all honesty, it depends on the stage of the company. Here is an example of ranges based on our market observations:
Based on these figures, customer retention for companies with “good” retention goes from 72% (for the smallest companies) to 84% (for the largest). Importantly, there is a clear correlation between customer retention and NRR: the higher the retention, the higher the NRR.
However, for companies in the $15m-30m range, even though they lost customers, their NRR was over 100%, which means they increased their profits from their loyal customer base.
For the companies in the “great” category, customer retention was all around the same (85-88%). However, NRR fluctuated quite a bit, from 98% to 119%. This means that some companies with similar churn rates were more able than others to maintain or increase profits from their existing customer base.
So in general, a net retention rate over 100% is an excellent sign for your SaaS, as it means you've brought in more revenue from your customer base over the year. Also, remember that you can still increase profits with churn rates of 15-20%.
Gross revenue retention (GRR)
What is gross revenue retention?
Gross revenue retention shows how much revenue a company has kept over a specific period, excluding expansions.
How do you calculate gross revenue retention?
To calculate GRR, let’s return to Bubble:
As a reminder, Bubble’s starting MRR is $83,333, with 10 customers each contributing $8,333 in MRR (We are not including expansions).
One customer decided not to renew their subscription, resulting in a churn of $10,000. Another customer decided to downgrade their subscription, resulting in a contraction of $833.
Now, let's calculate the Gross Revenue Retention of Bubble:
GRR = Starting MRR - churn - contractionsStarting MRR * 100
GRR = 83,333 - 10,000 - 83383,333 * 100
GRR = 72,50083,333 * 100
GRR = 87%
What is gross revenue retention useful for?
Gross revenue retention measures a company's ability to keep its customer base (avoid churn). Unfortunately, GRR is often overlooked in SaaS analysis, as many focus exclusively on NRR.
GRR is helpful because it ignores expansion, giving a long-term idea of your expected monthly revenue (assuming that your existing customer base does not upgrade their § subscriptions).
In short, GRR is a crucial metric to determine the long-term financial viability of your company.
What is the best gross revenue retention?
In all honesty, it depends on the stage of the company. Here is an example of ranges based on our market observations:
Based on these numbers, you can see that for companies with “good” retention, rates fluctuate depending on the size of the company. The bigger the company, the higher the retention.
For companies with “great” retention, however, rates barely fluctuate depending on the size of said companies.
How to track revenue retention?
Now that you know how vital revenue retention is, here are some tips to better track revenue retention.
Use analytical segmentation
Analytical segmentation is when you divide your customer base into specific groups. For a B2C business, you can divide it by customer behavior or age, whereas for a B2B business, you could divide it by industry company size or even level of spend.
With Fincome, you can tailor segmentation to divide your customer base. However, you wish to get the most precise insights into your company’s performance.
Segmentation is vital because it can let you:
- Identify hidden trends that ARR or churn rate aren’t able to reveal by themselves;
- Optimize your pricing strategy by making the most of your company’s growth levers;
- Improve your acquisition strategy and get new customers.
With these added insights, you can make more informed strategic decisions for your company.
Analyze customer cohorts
A SaaS cohort analysis examines the behavior and performance of customers who simultaneously signed up for your service. Cohort analysis shows a group of customers can impact revenue, user retention, and overall business growth.
It is best to represent cohort analyses visually. With Fincome, you can make clear and engaging graphs and charts with a single click, so as to share information with ease.
Implement proactive strategies
As a SaaS, it’s essential to be proactive in your approach and know how a change to your business today will affect revenue generation in the next 24–36 months. With Fincome, you can create forecasts in a single click, showing, for example, how current churn rates will impact your ability to grow.
With Fincome’s forecast feature, your company can make informed long-term decisions, such as planning to recruit new employees based on current subscription numbers.
In SaaS, having a clear grasp of GRR and NRR is essential to understanding how your company is performing. Thanks to NRR, you can find out how to maximize profit from your existing customer base, whilst with GRR you can discover how many customers are leaving your company.
With Fincome, the power of analytical segmentation and cohort analysis is at your fingertips. Analytical segmentation illuminates top-performing customer groups, and cohort analysis reveals how these groups evolve over time.
With these tools of analysis, your company can make informed strategic decisions moving forward and use vital information for growth. To learn more about Fincome, contact us today.
