To make it to the Super Bowl, a football team must have two things: a strong defense and a strategic offense. The defense maintains a good field position and prevents the opposing team from scoring points, while the offense orchestrates smart plays to gain additional yards and score points.
Similarly, to be successful, an enterprise needs to be able to prevent churn and increase revenue growth. Measuring and analyzing how your company manages these two factors is critical to growth. That’s why it is important to understand and track both gross retention and net retention. Distinguishing between these two metrics can provide insight into the health and success of your company, so let’s take a deeper look into what each metric is, how to calculate them, and how to apply them.
What is gross retention?
In football terms, gross retention, or gross revenue retention (GRR), is like the defense, determined to block any attempts by the opposing team (churn) to breach your end zone (revenue stream). It ensures your business maintains a strong field position, denies any losses, and fortifies your financial end zone.
In mathematical terms, GRR measures how much monthly recurring revenue (MRR) you retain each month after subtracting the effects of churn or downgrades to lower-priced products, but not the effects of upgrades.
Calculate it!
GRR can be calculated monthly, quarterly, or annually—depending on your selling model and typical subscription term—using this calculation:
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 MRR from customers who renewed at the end of the month, subtract any revenue lost because of customers who stopped buying from you or are purchasing less from you, and divide the result by your MRR at the beginning of the month. Multiply that total 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 gives you a snapshot of how stable your revenue is when you only consider customers who renewed, decreased their monthly spend, or churned. However, it does not factor in any additional revenue from customers who increased their average spend.
Isolating your recurring revenue without considering these growth factors is useful because it tells you how well you maintain your revenue levels solely based on consolidating your current revenue base. GRR provides a long-term outlook on how much revenue you can expect to make without assuming your customers increase their spending. At the same time, it tells you how much revenue you’re losing because of customer churn or downgrades. This visibility can reveal early warning signs if you’re facing a long-term risk of losing revenue, empowering you to bulk up your defensive line and start taking preventive measures like implementing a customer success adoption plan to discourage downgrades.
What is net retention?
Going back to our football example, net retention, or net revenue retention (NRR), takes on the role of the offense, orchestrating clever plays to score points by retaining existing customers while making strategic moves to gain additional yards (revenue). It’s like a well-executed offensive strategy, where upsells, cross-sells, and expansions are the tactical plays that advance your business down the field, securing victories beyond the initial customer acquisition.
In mathematical terms, GRR measures how much monthly recurring revenue (MRR) you retain each month after subtracting the effects of churn or downgrades to lower-priced products, but not the effects of upgrades.
Calculate it!
Mathematically, net retention is similar to gross retention except that it also factors in how revenue losses from churn and downgrades are offset by upsells and cross-sells. The equation for calculating NRR is:
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
Let’s take the same example from above, but now we’ll assume that MRR increased $10,000 from upgrades:
NRR = [($95,000 + $10,000 – $2,500 – $2,500) / $100,000] * 100 = 100%
This example illustrates how you can maintain a 100% NRR even if you’re losing revenue from churn and downgrades as long as upgrades offset your revenue loss. Your NRR can exceed 100% if you have high renewals combined with strong upgrades, low churn, and low downgrade. Ideally, this is what you should aim for to grow your revenue.
NRR helps you focus on how quickly your revenue grows from upgrades, which can give you insight into how well your cross-sell and upsell strategies work. If your analysis indicates that you’re underperforming in these areas, it’s time to implement new offensive strategies, such as developing a customer expansion strategy to promote increased adoption and upgrades.
Optimize your retention to increase your revenue
Just as a successful football team needs both a robust defense and a dynamic offense to secure victory, a thriving business needs to measure, analyze, and act on both GRR and NRR metrics to prevent churn and increase revenue growth. When applied together, these metrics provide a complete picture of how well your retention and growth strategies work and where you need to make adjustments.
Totango’s customer success software helps give you the full-picture view you need and provides tools that help you automate workflows and boost productivity. Learn how Totango can help you create a winning strategy to propel your business forward and claim victory.
