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Net Revenue Retention vs. Gross Revenue Retention: Explained
Choosing between Net revenue retention (NRR) and gross revenue retention (GRR) as your north-star growth metric isn’t an either-or question. SaaS companies must be cognizant of and weigh the implications brought about by a sole focus on these metrics when assessing the performance of and building strategies for Customer Success.
In this article, you’ll learn:
- Differences between net revenue retention, gross revenue retention, and customer retention with definitions and examples
- Implications of a NRR focus and a GRR focus
- Recommended actions to maximize NRR and GRR
Net revenue retention defined
NRR reflects your ability to retain and expand customers. NRR calculates total revenue (including expansion) minus revenue churn (contract expirations, cancelations, or downgrades).
- Your business enters January with an MRR of $27,000 and exits January with an MRR of $35,000 (due to upsells) from the same customers at the start of the month.
- Your business exits January with $5,000 in revenue churn due to contract expirations.
- Your NRR for January is 111% ($30,000 ÷ $27,000).
Gross revenue retention defined
GRR reflects your ability to retain customers. GRR calculates total revenue (excluding expansion) minus revenue churn (contract expirations, cancelations, or downgrades). The difference between NRR and GRR is that GRR doesn’t account for expansion revenue.
GRR also tends to decline as companies grow. Over time, your customer base becomes more diverse and has more opportunities to churn.
- Your business enters January with an MRR of $27,000.
- Your business exits January with $5,000 in revenue churn due to contract expirations.
- Your GRR for January is 81% ($22,000 ÷ $27,000).
Customer retention defined
A similar but simpler version of GRR is customer retention (also known as logo retention). Unlike GRR, customer retention is purely based on customer count, not the retained revenue from customers. Customer retention measures the total number of churned customers during a period against the the total number of customers at the start of that period.
- Your business enters January with 100 customers.
- Your business exits January with two churned customers.
- Your logo retention for January is 98%.
Generally, Customer Success functions are tasked by their management team or board to focus on either NRR or GRR/customer retention. In the section below, we’ll discuss the implications of having a central focus on each of these metrics.
Note: For the sake of simplicity, in the remainder of this this article, we’ll refer to GRR and customer retention collectively as “GRR/customer retention.”
The effects of a net revenue retention focus
Below are the implications of having a sole focus on NRR.
- You create tiered experiences. With a NRR focus, it’s much more meaningful when your big customers renew and expand than when your small customers do. Customer segmentation should be a high priority and central to your strategy. Your services will need to distinguish and accommodate the differences in customer value. For example, you craft a white-glove service for your high-value customers and a low-touch service for your low-value customers.
- You move towards product packaging. A greater emphasis is placed on product packaging to generate more and larger upsells and cross-sells to grow revenue year-over-year.
- You build a more growth-oriented team. Since you’re always looking for new expansion pathways, you need to build a Customer Success team that’s focused on growth and sales. Your team will not only be customer-facing, but they’ll also be business oriented. They should be just as good at delivering value to customers as they are at seeking out upsell and cross-sell opportunities.
- You cause unnatural behavior without an eye on logo retention. For the sake of example, let’s say you don’t care at all about GRR/customer retention and completely ignore it. Then, a hyper-focus on NRR can start to cause unnatural behavior. Because company size is so consequential to NRR, if a large company requests a change, you immediately do it. You agree to more one-off product enhancements and take on more custom work. And in moderation, that’s OK. But SaaS companies can get majorly derailed when they deviate too far too often from their product roadmap.
It’s also worth mentioning that investors will carefully analyze your customer concentration. If the requested or custom product work you’re doing for one or two large companies can also be sold to your other customers, that’s fine. But be cautious of the revenue creep from those larger companies as it could tip the balance. If you become 40%–50% concentrated, that’ll give investors a cause for concern.
With that said, there’s many beneficial reasons for being NRR focused. NRR is arguably the most important metric for Customer Success teams. But if it’s the only metric that’s guiding you, you’ll end up with a narrowed perspective that could mask a retention problem.
Now, let’s move onto the implications of a GRR/customer retention focus.
The effects of a gross revenue retention and customer retention focus
Below are the implications of having a sole focus on GRR/customer retention.
- You push for a more uniform customer experience. With a GRR/customer retention focus, whether a customer signs a million-dollar contract or a thousand-dollar contract, they hold the same value to you. The benefit is that this metric is easier to manage and automate. The downside is that a one-size-fits-all experience doesn’t work. You should be providing your larger customers with a different experience than your smaller ones.
- You focus more on product experience. Every single customer counts from a GRR/customer retention perspective. So, you want to ensure that users love your product and that you’re soliciting and applying their feedback.
- Your retention conversations move upstream to Sales and Marketing. Retention accountability extends beyond Customer Success to Sales and Marketing. Questions of whether these supporting functions deliver great customers becomes a central focus. A greater importance is placed on your ideal customer profile, positioning, messaging, and outreach strategy to prevent signing bad-fit customers.
Both NRR and GRR/customer retention have their fair share of positive and negative implications. In the end, it comes down to striking a balance between the two. Use these metrics in conjunction with one another to tell the whole story of your customer retention and to avoid pushing a false narrative.
Now that we’ve covered the implications of a NRR and GRR/customer retention focus, let’s talk about how you can maximize the benefits of each.
How to maximize net revenue retention
Below are recommended actions you can take to maximize NRR.
- Adjust your Customer Success compensation plan for growth. Many Customer Success teams have a small bonus pool. But adding a variable component encourages proactive behavior by tying individual team member responsibilities to your department’s goals. Variable pay is an effective way to tell your team where and how to focus their energy, such as on expansion opportunities.
- Tier your customer base and focus on usage and engagement. When you focus on NRR, losing your bigger customers hurts. You need to closely track their usage and engagement to ensure a faster time to value and continued product adoption.
- Invest in data, especially customer health scores. Investing in data and processes is necessary for both focus areas. But data becomes even more important with a NRR focus because you need to know the ideal time to approach customers about expansion opportunities. Buying signals can be triggered by health scores based on factors like license utilization, product or feature usage, engagement frequency and quality, resource consumption, and more.
How to maximize gross retention revenue and customer retention
Below are recommended actions you can take to maximize GRR/customer retention.
- Ensure you spend enough on Customer Success. You can’t invest in Customer Success and simply hope your customers magically stay. Customer loyalty isn’t a given, it must be earned through relationship building, value realization, and consistent experiences. For a baseline, you should invest 5%–15% of your revenue in Customer Success, but the exact percentage will depend on your service portfolio.
- Obsess over onboarding. For subscription companies, your first impression is the most important impression. Onboarding has a long-lasting impact with deep ties to a customer’s likelihood to churn. During this phase, you must identify what’s important to the customer, set clear expectations, and measure success to accelerate time to the initial value.
- Invest in process. As your company grows, process becomes the bedrock of your work. You need to breed consistency and dependability with how your internal team works together and with the customer to build a strong brand and experience.