What Is Gross Revenue Retention (GRR) and How Is It Calculated?
As a Saas company, the word 'retention' is, for sure, a big part of your life. However, most SaaS people and customer success managers fail to appreciate the great impact of Gross Revenue Retention (GRR) because they only pay attention to customer retention.
When understood and used correctly, this retention metric is an amazing growth indicator that can help you understand if you should pay attention to lowering customer churn rate, increasing product usage, generating demand, the effects of churn, and so on.
To learn more about GRR, and how it can transform your perception of revenue growth, keep on reading.
What is Gross Revenue Retention?
Gross Revenue Retention, put simply, is a certain business's capability to retain its current customers. When it comes to thinking about it, it is easy to understand that a business retains annual revenue when it retains its customers; in other words, the exact percentage of clients that your business is able to retain at the current price limit or the contract value is what we call, the Gross Revenue Retention.
And What is Not a Gross Revenue Retention?
This metric is called gross ''revenue'' retention (GRR) for a reason. This highlights the fact that what we're talking about here has more to do with the percentage of revenue retention rather than focusing on customer retention. Even though these two things are indirectly related -given the fact that the more happy customers you retain, the more revenue you retain- in this context, we will be looking into revenue retention. You will soon understand that separating revenue retention like this can positively impact your insight into the role your client retention plays in your overall revenue outcomes.
Unlike the Net Revenue Retention, the Gross Revenue Retention does not seem responsible for revenue gained thanks to expansion, upsells, and cross-sells, although it includes possible downgrades or subscription cancellations.
Some businesses choose to use the gross revenue retention (GRR) rate to gain a more accurate understanding of a company's long-term success and health as this metric does a profound job of indicating whether a product represents a solid value proposition for the customers or not.
Having said that, you might have wondered what's more to this key metric by now. Let's dive deeper into it.
Why Is Gross Revenue Retention Important?
Gross Revenue Retention comes in handy under many circumstances. For starters, it is most useful in the frame of net revenue retention. Let's say your net revenue retention is high, but gross revenue retention is low; this means your business is not ready yet to attract and keep the attention of investors.
In that case, the most logical interference you can make is that only a few customers out of your customer base are being retained and moved through your sales funnel; on the other hand, those who decide not to take this journey often end up canceling their subscription.
This is exactly where Gross Revenue Retention steps in as a striking metric that reveals your company is not a valid investment in the eyes of investors; therefore, it becomes crucial for you to improve your retention -focusing on gross revenue- and change the way things work for the sake of your business' success and your growth rate.
This way, your Gross Revenue will be able to tell you how stable your revenue has been without making any assumptions, letting you analyze and track the number of negative churn and downgrades being cut into your revenue. If you happen to gain negative results showing that they drain a quite amount of your revenue, you must take inhibitory steps, such as reaching out to clients that are at risk of monthly churn or creating a solid customer success adoption plan to discourage such harmful actions.
How to Calculate Gross Revenue Retention
Until now, we have talked about the Gross Revenue Retention being the rate of existing customers retained during a given period of time.
And now, it's time to talk about how you can calculate it. Don't freak out yet. I will be giving a basic formula for calculating this critical metric and explaining its elements right after. Here you go.
GRR = (MRR start – Customer Churn – Contraction) / MRR
Voila. This is our formula right here.
But what does it mean?
MRR start, to begin with, refers to the Monthly Recurring Revenue at the starting of the current month. This may be the recurring revenue of any period for which you need to calculate the Gross Revenue Retention. And this formula has the 'month' since, generally, SaaS businesses need to calculate their gross revenue retention on a monthly basis.
Next, Customer Churn Rates refer to the loss of revenue resulting from customers who canceled their subscription or ended their contract with your business. At its core, it's a loss of revenue from customers.
Lastly, Contraction refers to the lost revenue resulting from clients who downgraded their subscription plan to a cheaper one. It can be considered a partial loss of revenue as the revenue from the customer has reduced in number instead of ending completely.
What is a good gross revenue retention rate?
As you can imagine, the standard benchmark for a good gross revenue rate may -and often does- vary from business model to business model; however, the closer the GRR to 100%, the more satisfactory results it indicates in terms of company success and business health.
Across all SaaS businesses, the medium Gross Retention Rate is usually around 90%, but this percentage changes and drops to 80% when the given SaaS companies are selling into small and/or medium businesses. Similarly, for Enterprise SaaS, 90% is almost always considered a very good Gross Retention Rate.
Quick Tips to Improve GRR
You must have understood by now that you cannot directly control the flow of your Gross Revenue Retention; however, this does not necessarily mean there is NOTHING you can do about it.
In fact, there are several things you can do to influence your customers' final decisions and prevent them from canceling or downgrading their annual contracts with you.
I know you're dying to know.
Let's see some of the quick tips you can follow.
1- Pay extra attention to the improvement of the overall experience you offer.
As a subscription business,r you must have already realized that first impression matters. It matters big time. This is because it is closely tied to the overall product experience you offer, from the beginning until the end. This is where onboarding comes in; with its long-lasting impact and close connection to the likelihood of revenue churn, onboarding is the part where you must identify what matters for your customer, set expectations accordingly, and fix the possible fractions along the way. With this attitude onwards, you'll be able to create constant improvements within the user experience you provide to your clients.
2- Be reliable at all costs.
The more your business grows, the more process it requires to stay alive. You need to make your name stand out when it comes to consistency and dependability with the way you increase the customer lifetime value and the way your sales teams work collaboratively and with the clients to create a solid reputation and offer a great customer journey. This way, you'll be avoiding possible customer downgrades, benefitting from solid retention strategies, and making your customers happy as an overall result.
3- Meeting client expectations is great enough. How about exceeding them?
The idea sounds amazing, I'm aware. But ''how'' is the question. First things first, you need to be a great listener as a customer success leader, identify and discuss your customers' needs, thus making them feel heard and appreciated. This way, it will become a piece of cake for you to determine a churn indicator before it's too late. When you make mistakes or disappoint them -which is always a possibility- you need to know how to apologize and how to make up for your mistake; you can offer a special treat, feature, a discount, and so on.
Also, keep in mind that getting regular feedback from your customers helps a lot, as well. This way, you can have a look from their perspective and have a better understanding of the complete picture that shows what's working great and what isn't.
4- Make sure your customer success team is up and running.
Customer success depends on many things, but perhaps the most obvious among them are loyal customers and overall customer health. It's a factor that is not given automatically but rather earned through years of customer relationship building, mutual trust, customer satisfaction, value appreciation, and consistent communication. And for all these to happen, you should be investing 5%-15% of your overall revenue in your Customer Success departments, and keep your communication and sharing channels with them active.
