When it comes time to determine your company’s growth and customer retention, you have different performance metrics at your disposal. Two notable examples to include on your KPI dashboard are gross revenue retention (GRR) and net revenue retention (NRR).
Here, we’ll cover everything you want to know about calculating these metrics and using this information to improve your overall business performance.
Understanding Revenue Retention
Your business relies on revenue to keep its doors open. Without healthy revenue retention, it won’t be able to sustain or grow its revenue base.
Revenue retention metrics measure how much revenue a company retains from its existing customers over a specific period.
Two main revenue retention metrics are gross revenue retention (GRR) and net revenue retention (NRR).
Gross Revenue Retention (GRR)
Gross Revenue Retention (GRR) is the percentage of revenue retained from existing customers, excluding expansion revenue.
GRR focuses on keeping your existing customers engaged. This means, with a good GRR, your customers aren’t churning. They’re not downgrading or canceling their service.
Instead, your customers stick around, and so does your revenue.
A high GRR indicates that your business is stable—you can keep the revenue you have without having to acquire new customers or upsell existing ones.
GRR Formula
The GRR formula is:
GRR = (Starting Revenue − Churn Revenue − Contraction Revenue ÷ Starting Revenue) ×100
Step-by-Step Calculation
Identify the Starting Revenue from Existing Customers
Include revenues from all customers at the beginning of the period you are measuring (e.g., at the start of the quarter or year). Exclude revenues from new customers acquired during the period and expansion revenues from those existing customers.
Calculate Revenue Lost Due to Churn or Contraction
Calculate the total revenue lost during the period due to customers downgrading their service (contraction) or canceling altogether (churn).
Subtract the Revenue Lost from the Starting Revenue
Subtract the total revenue lost due to churn and/or contraction from the starting revenue. The result is your retained revenue.
Divide the Retained Revenue by the Starting Revenue
Divide the retained revenue by the starting revenue to determine the percentage of revenue that has been retained.
Get Your GRR Percentage
Multiply that percentage by 100 to get your GRR.
GRR Calculation Example:
Assume your company started the quarter with $1,000,000 of revenue from your existing customers.
You lost $50,000 during the quarter due to churn and contraction, leaving you with $950,000 in retained revenue.
- Starting Revenue: $1,000,000
- Revenue Lost Due to Churn/Contraction: $50,000
- Retained Revenue: $1,000,000 – $50,000 = $950,000
GRR = (950,000 ÷ 1,000,000) × 100 = 95%
The GRR for this period is 95%. This means your company retained 95% of its revenue from existing customers during the period, net of churn and contraction.
What is a Good GRR?
Most businesses aim to hit a GRR of at least 90%, but the exact goal depends heavily on the industry, time period, and other factors.
Net Revenue Retention (NRR)
Net Revenue Retention (NRR) tracks only the total change in revenue from existing customers, including expansions (upsells or cross-sells) and contractions (downgrades).
NRR is a growth metric that shows how well your company can increase revenue from its existing customer base without expanding.
NRR Formula
The NRR formula is: NRR = (MRR(Start) + Expansions – Churn – Contractions) ÷ MRR(Start)
Step-by-Step: Calculating NRR
Identify the Starting MRR (Monthly Recurring Revenue) from Existing Customers
This is the revenue from all existing customers at the beginning of the period you are measuring (e.g., at the start of the quarter or year). It does not include any revenue from new customers.
Calculate Expansions
Sum up all additional revenue generated with the existing customer base for that period via upsells or cross-sells.
Calculate Churn
Determine the total revenue lost due to customers canceling their service.
Calculate Contractions
Determine the cost of revenue lost due to the customer’s downgrade to a lower-priced plan during the period.
Apply the NRR Formula
Enter these numbers into the NRR formula to calculate your total net change in revenue from existing customers.
Get Your NRR Percentage
Multiply the result by 100 to get the NRR as a percentage.
NRR Calculation Example:
Suppose your company started the quarter with $1,000,000 in Starting MRR.
During the quarter, you added $200,000 through Expansions (upsells and cross-sells), lost $50,000 through Churn, and experienced $25,000 in Contractions (downgrades).
- Starting MRR: $1,000,000
- Expansions: $200,000
- Churn: $50,000
- Contractions: $25,000
NRR Calculation:
(1,000,000 + 200,000 – 50,000 – 25,000 ÷ 100,000) x 100%
NRR = (1,125,000 ÷ 1,000,000) × 100% = 112.5%
An NRR of 112.5% indicates a 12.5% increase in revenue from your existing customers for that period.
What is a Good NRR?
This brings us to your next question: what is a good NRR?
This depends on the industry, but the higher, the better. Anything over 100 indicates growth, while under 100 suggests a decline in revenue from existing customers.
Learn all about revenue recognition principles in FP&A next.
Why Revenue Retention Matters
Retaining existing customers is more cost-effective than acquiring new ones. In fact, it costs an average of four to five times more to acquire a new customer than to keep an existing one.
High revenue retention ensures the stability of your income and increases your profitability. Paying attention to GRR keeps your revenue base solid, while NRR allows you to track and drive growth from your existing relationships.
We talk about the crucial distinctions between revenue and profit in this article.
When to Use GRR vs. NRR
Both metrics serve important purposes, but the most suitable metric varies depending on certain circumstances. Further, these metrics are not mutually exclusive. You can use both of them to gather different insights.
For example, GRR is an excellent measure of the revenue ‘stickiness’ your existing customers provide. It shows you how well your business is retaining its customers without any incremental revenues from upselling and cross-selling.
Conversely, NRR is a better metric to track growth and the efficacy of your upsell approach.
It gives you a complete picture of how your company’s revenue changes over time. NRR measures the combination of retaining revenue you’ve earned previously and adding new revenue from existing customers.
In this article, we also talk about how to grow your revenue by building your customer lifetime value.
Improving Gross Revenue Retention (GRR)
Like the metrics themselves, there are different approaches to take when it comes to improving them.
To improve your GRR, focus on the following strategies:
- Increase customer satisfaction: Increase return on customer acquisition. Loyal users are likelier to stay with you once they’ve signed on. To this end, you should regularly solicit input from your customers and make changes to the service based on what they want.
- Cultivate trust: Build relationships with long-term customers and prospects by consistently delivering what you promised and providing excellent, service-oriented care.
- Increase product usage: Offer training, support, and other integrations to encourage your customers to get the most out of your products or services.
Improving Net Revenue Retention (NRR)
To increase your NRR, focus on customer expansions and your value props:
- Focus on customer expansions: Develop upselling or cross-selling strategies for your existing customers and present them with the right products or services that add value to them.
- Sharpen value ladders: Offer detailed paths that allow customers to climb from one service level to the next, with each step offering more value than the last.
- Deliver the goods: Outstanding customer service and relationship management can lead to natural upsells as your clients’ confidence in your services increases.
3 Common Mistakes in Retention Strategies
Your retention strategies should focus on keeping your existing customers happy and satisfied.
However, there are some common mistakes many businesses make when it comes to retaining their customers:
Avoid these three common pitfalls that can negatively impact your revenue retention rates:
- Ignoring the voice of the customer: Allowing customers to slip away without even hearing about their issues means you are missing an opportunity to improve your product.
- Overlooking small customer segments: Smaller segments may be the most loyal. Losing them could cost you a steady revenue stream.
- Unable to adapt to market changes: As the market changes, your retention strategies should change, too. Stay agile and responsive to changing trends.
Industry-Specific Strategies for Revenue Retention
Different industries require tailored strategies to maximize revenue retention.
Here are four examples:
- Manufacturing: Customizing solutions and offering after-sale services can provide your customer loyalty metrics with a boost.
- Real estate: Building long-term relationships with tenants can facilitate stable revenue streams.
- SaaS: Subscription models that can be tailored to customers’ needs help with better GRR and NRR.
- Retail: Utilizing membership programs can enhance customer loyalty and increase NRR in retail.
The Importance of Reliable Financial Data When Calculating GRR & NRR
Your metrics are only as useful as they are accurate.
Correctly calculating GRR and NRR can significantly impact your business’s success, so make sure you have accurate, real-time data. Otherwise, you can’t make informed decisions about how to run your business.
Datarails makes collecting and reporting on financial data easy, so you’ll have the hard facts to back up your revenue retention strategy.
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