When you’re applying for funding as a SaaS start-up, investors are most likely to analyze some key metrics. Two of the most popular are Gross Revenue Retention (GRR) and Net Revenue Retention (NRR).
As a SaaS business, you are most likely to be operating a subscription-based business model. This means your ability to retain customers is incredibly important. In the SaaS industry, the average cost to acquire new customers is just $1.18 – which means it’s an incredibly competitive marketplace.
Revenue retention is the revenue generated by a company from the previous month’s (or year’s) customers. Gross revenue retention and net revenue retention indicate how well you retain the revenue your customers bring. Since it’s cheap and easy for competitors to acquire new customers, these are the metrics worth paying attention to.
Net Revenue Retention
Net Revenue Retention (NRR) is the percentage of recurring revenue retained from existing customers over a given time period (usually monthly or annually). It takes into account income from upgrades, cross-sells, downgrades, and cancellations.
NRR is calculated to primarily help businesses understand how their churn rate fits in the context of overall revenue. Churn refers to the percentage at which current customers cancel their subscriptions or services with your business (again, this is measured monthly or annually). Thus, this is the monthly recurring revenue totalled from all customers.
Why is NRR important?
Firstly, net revenue retention a significant indicator for determining customer success. Retaining net revenue speaks to repeat business from the same customers, who are eventually turned into fans and are even more likely to refer other customers to your SaaS product. Plus, an NRR of more than 100% means that even if your business never onboarded another customer, you would continue to grow.
Secondly, an excellent net revenue retention rate (over 100%), suggests predictable and scalable business growth. The fastest-growing SaaS companies are generating $3.9 for every $1 lost to churn. Therefore, the higher the NRR rate, the more attractive your business will be to investors.
Calculate Net Revenue Retention Rate
In order to calculate the monthly NRR, you’ll need to know:
- Last month’s recurring revenue
- Churn
- Revenue from expansion (upsells, cross-sells)
- Revenue from downgrades and cancellations
The formula to calculate net revenue retention is as follows:
(Total Revenue + Revenue from expansion & downgrades – Churn)/ Total Revenue
For example, let’s say you have 10 customers, each paying $1,000 for their software subscription, leading to total revenue of $10,000. Now, 1 customer decides to cancel, 7 renew their subscriptions, and you upsell 2 customers to a new package at a $2,000 price point. The calculation would be as follows:
(10,000 + 4,000- 1,000) / 10,000 = 130%
So, while the number of customers has decreased, the average value each customer brings to your company has increased. This has led to growth in the business capital and predictable growth moving forward.
SaaS funding options
Ready to take your SaaS startup to the next level? We’ve put together a list of the funding options that can help you find one best suited to your stage of growth.
Gross Revenue Retention
Gross Revenue Retention (GRR) measures annual revenue lost from a company’s customer base, not including any benefits from revenue expansion (including cross-sells, upsells, or price increases). GRR shows a company’s success in retaining its existing customers.
Some analysts prefer to use the gross revenue retention (GRR) rate in order to get a more realistic understanding of the long-term health of a company. Since GRR eliminates the interference of revenue from upgrades, cross-sells, and downgrades, this metric has a closer relationship to the customer retention rate.
GRR is always equal to or lower than NRR (since it eliminates the extra income sources) and will never exceed 100%. It is considered a truer measure to track how well existing customer income is retained on an annual or monthly basis.
Why is GRR Important?
Gross revenue retention is most useful in the context of net revenue retention. If net revenue retention is high, but gross revenue retention is low, your business may have trouble attracting the interest of investors. This is because only a few customers are being retained and moving down through the sales funnel. Unfortunately, it means that those who choose not to progress typically cancel instead of retaining their current subscription.
With a low GRR, expect investors to be more reticent to commit to your business. This is one of the most striking metrics for revealing that your company is not a viable investment. Thus, calculating and then improving your retention (gross revenue-focused) is highly recommended by industry leaders.
Calculate Gross Revenue Retention Rate
In order to calculate the gross revenue retention rate, you’ll require:
- Total revenue
- Churn
The formula for GRR is as follows:
(Total Revenue – Churn) / Total Revenue
Let’s use an example. 10 customers are each paying $1,000 for their subscription, then 2 customers cancel.
(10,000 – 2,000) / 10,000 = 80%
Since GRR does not consider upsells, cross-sells, or downgrades, you have a revenue retention gross of $8,000 and a rate of 80%. The average SaaS company GRR is 90%, which is a high benchmark compared to other industries. It again speaks to the competition in the industry, and propels constant improvement.
How to Optimise NRR and GRR
It’s important to note that gross revenue retention and net revenue retention are not the same as customer retention. While customer retention measures the number of customers retained, both net revenue retention and gross revenue retention instead focus on the revenue retained by a company. Therefore, the number of customers is less relevant.
As mentioned, optimizing NRR and GRR is important for investors. To give your company the best chance of securing funding, revenue retention rates should be explored and improved. Since the churn rate has a direct impact on both KPIs, its drivers must be well-understood in order to be improved.
For SaaS businesses, some common reasons for churn include lack of customer success/ support and technical product issues. While you can’t do too much against competitors, you can focus on improving these features to combat revenue lost due to churn.
Retaining your customer base is also improved by using the right actions at each point along the customer journey. For example, pushing a new customer into upgrading right away could harm the growth rate and result in a cancellation. However, after 6 months of onboarding (including multiple emails and marketing materials), the customer is better primed for an upsell.
Though many SaaS businesses prefer to skim over analytics, these KPIs are the all-important decision-makers for investors. To better prepare your business for funding to put back into your company to improve services, check out some of our successful SaaS start-up case studies for R&D funding.
