Distinguishing gross retention vs. net retention can provide deeper insights into your success metrics. Learn what these KPIs tell you. We’ll cover what they are, how to calculate them, and how to apply them.
What Is Gross Retention?
Let’s start with gross retention. This metric is also known as gross revenue retention (GRR), which highlights the fact that we’re talking here about revenue retention rather than customer retention, at least directly. Of course, these two things are indirectly related, in that the more customers you retain, the more revenue you retain. However, in this context, we’re focused on revenue retention. As we’ll see later, isolating revenue retention in this way can lend you insight into the role your customer retention plays in your revenue results.
Gross revenue retention measures how much of your monthly recurring revenue (MRR) you retain each month after you’ve subtracted the effects of churn or downgrades to lower-priced products, but not the effects of upgrades. Gross revenue retention can be calculation in monthly, quarterly or annually depending on your selling model and typical subscription term. This can be mathematically expressed as a formula for monthly:
GRR = [(MRR from renewals – MRR lost due to churn – MRR lost due to downgrades) / MRR at the beginning of the month] * 100
To apply this formula, take your monthly recurring revenue from customers who renewed at the end of the month, subtract any revenue lost because of customers who stopped buying from you, switched to a lower-priced product, or in general is purchasing less from you, and divide the result by your monthly recurring revenue at the beginning of the month. Multiply by 100 to convert the result to a percentage.
For example, let’s say your MRR at the start of the month was $100,000, your MRR from renewals at the end of the month was $95,000, you lost $2,500 from churn and you lost another $2,500 from downgrades. Plugging these numbers into the formula would yield:
GRR = [($95,000 – $2,500 – $2,500) / $100,000] * 100 = 90%
GRR can never exceed 100% because even if you maintained renewals of all accounts without any churn or downgrades, you’d still have the same MRR at the end of the month that you had at the beginning. GRR can only go down from 100%, not up. This is one difference between gross retention vs. net retention since the latter can exceed 100%.
You can easily modify the above formula to calculate gross retention for some other period of time other than a month. Simply use figures for a quarter, a year, or whatever interval you want to track instead of monthly figures. The only two variables you’ll need to update in the formula would be the amount of time and the interval for the recurring dollar amount.
Gross retention gives you a snapshot of how stable your revenue is when you’re only considering customers who either renewed with you, decreased their monthly spend with you, or stopped buying from you. It does not factor in any increases to your revenue from customers who increased their average spend per month with you by making cross-sell or upsell purchases.
Isolating your recurring revenue without considering these growth factors is useful because it tells you how well you’re doing at maintaining your revenue levels solely based on consolidating your current revenue base. This provides you with a long-term outlook on how much revenue you can expect to make without assuming your customers increase their spending with you. At the same time, it tells you how much revenue you’re losing because of customer churn or downgrades. This can provide an early warning sign if you’re facing a long-term risk of losing revenue, empowering you to start taking preventive measures.
What Is Net Retention?
Now let’s talk about net retention, also called net revenue retention (NRR). This is very similar to gross retention, except now we factor in how losses in revenue from churn and downgrades are offset by upsells and cross-sells. Note that once again we’re talking about revenue retention rather than customer retention. However, again, it is possible to talk about net customer retention as well as net revenue retention, and these two variables affect each other. It’s important to note that these two variables are closer to the same if you’re selling a single product or service. But at the moment, we’re focused on revenue retention.
The formula for calculating net revenue retention is almost the same as that for gross revenue retention, except we need to add in the effects of upsells and cross-sells. We’ll call these “upgrades” for short for the sake of simplifying our formula. When this new variable is added in, our formula for GRR becomes NRR:
NRR = [(MRR from renewals + MRR from upgrades – MRR lost due to churn – MRR lost due to downgrades) / MRR at the beginning of the month] * 100
To illustrate how this works, let’s take the same situation we had earlier, except now we’ll assume that MRR increased $10,000 from upgrades:
NRR = [($95,000 + $10,000 – $2,500 – $2,500) / $100,000] * 100 = 100%
As this illustrates, you can maintain a 100% NRR even if you’re losing revenue from churn and downgrades as long as upgrades are offsetting your revenue loss. This shows why NRR is good for showing how much your upgrades are increasing your revenue, but not as useful for isolating the effects of churn or downgrades.
It’s possible for your NRR to exceed 100% if you have high renewals combined with strong upgrades, low churn and low downgrades. Ideally, this is what you should aim for to grow your revenue.
As with gross retention, net retention can be calculated for other time frames besides a month by using numbers from the appropriate interval. You can calculate gross retention for monthly, quarterly, or yearly intervals.
Gross Retention vs. Net Retention: Which Should You Track?
So which is more essential to track, gross retention or net retention? The answer is you need both because they both tell you important information.
Gross revenue tells you how stable your revenue is without assuming growth from upgrades. This lets you analyze how much churns and downgrades are cutting into your revenue. If you determine that they’re a significant revenue drain, you can then take preventive steps, such as reaching out to customers at risk of churn or implementing a customer success adoption plan to discourage downgrades.
Net revenue, on the other hand, helps you focus on how quickly your revenue is growing from upgrades. This can lend you insight into how well your cross-sell and upsell strategies are working. If your analysis indicates that you’re underperforming in these areas, you can take steps such as developing a customer expansion strategy to promote increased adoption and upgrades.
Optimize Your Retention to Increase Your Revenue
Gross retention tells you how much revenue you’re maintaining when activity that increases your average customer value isn’t factored in. Net retention tells you how much revenue you’re maintaining when revenue-increasing growth activity is part of the equation. You need both metrics for a complete picture of how well your retention strategy is working.
Tracking revenue retention isn’t just an end in itself, but it can become a step toward making adjustments and improvements which increase both your customer and your revenue retention. Totango’s Spark platform helps you automate practices and processes which promote customer retention and thereby increase revenue retention. See a live demo of how it works and try it free to experience for yourself how Spark can help you increase your customer and revenue retention.