Gross Revenue Retention vs Net Revenue Retention
10 mins readSep 28, 2022
The terms “net retention vs gross retention” are often used interchangeably in the startup world. However, entrepreneurs need to be aware of an important distinction between the two.
Gross retention refers to the percentage of customers that remain active within a given period. In other words, it’s a measure of how many customers are still using your product or service after a certain amount of time has passed.
Net retention, on the other hand, considers both gross retention and customer churn (the percentage of customers who stop using your product or service). So, while gross retention measures how many customers are still active, net retention measures how many customers you’re actually gaining over time.
You generally want your net retention to be higher than your gross retention. If it’s not, you’re losing more customers than you’re gaining, which is not sustainable for any business.
What is net retention?
Net retention keeps track of how much revenue a company generates and loses in a month or year. It’s a crucial metric for subscription businesses as it measures the income a company retains from its customers over time. A high net retention rate means the company effectively retains its customers and grows its business.
How to calculate net retention revenue?
There are a few different ways to calculate net retention, but the most common method is to take the total revenue at the end of a period and subtract any churned revenue. Churned revenue is defined as any revenue lost during the period because of customer attrition.
For example, Company ABC had $100,000 in recurring revenue at the end of January. Three customers canceled their subscriptions in February, resulting in $10,000 in churned revenue. Company ABC’s net retention rate for February would be 90% (($100,000 - $10,000) / $100,000).
The calculation of net retention can tell you how to retain existing customers.
But it doesn’t tell the whole story. For example, if your company has a high net retention rate but a low gross margin, it may not be sustainable in the long run.
Moreover, if your company has a low net retention rate but a high gross margin and low acquisition costs, it may still be able to grow successfully. As with all metrics, it’s essential to put net retention into context and use it as one piece of information when making decisions about your business.
What is Gross Retention?
Gross retention is the percentage of revenue a company retains from its customers. In other words, it measures how much money a company keeps from its money. Gross retention is necessary because it’s a good indicator of whether a company is growing.
A company with a high gross retention rate keeps most of its customers and makes more monthly money. On the other hand, if a company has a low gross retention rate, they’re losing customers and not making as much money from them each month.
A high gross retention rate is also significant because it shows that a company has sticky products/services. In other words, once people start using them, they don’t stop using them (or they use them so much that they’re willing to pay more each month). This is valuable because companies with sticky products have an easier time acquiring new users since they know those users are likely to stick around and pay for their product/service long-term.
How to calculate Gross retention revenue?
There are two ways to calculate gross retention: The first way is to take the monthly recurring revenue (MRR) and divide it by the previous month’s MRR. This will give you your gross retention rate for that month. The second way is to take the total revenue (usually 12 months) and divide it by the total number of customers at the beginning of that period. This will give you your average gross retention rate over time.
How do you calculate gross revenue retention vs net revenue retention?
Calculating gross net retention vs gross retention is not difficult as it looks.
To calculate gross retention, you take the number of customers at the end of a period and divide it by the number of customers at the beginning. For example, if you had 100 customers at the start of January and 90 at the end of January, your gross retention would be 90%.
To calculate net revenue retention, you take the total recurring revenue at the end of a period, subtract out any lost customers’ recurring revenues, and then divide it by the total recurring revenue at the beginning of that same period.
How do you differentiate between net retention vs gross retention?
Maintaining the balance between net retention vs gross retention can be a challenge for some businesses for some time.
NRR is the percentage of customers who stay with a company over a given period.
GRR is the percentage of customers’ total spending that stays with a company over a given period.
How to maintain a perfect balance between net retention vs gross retention for any business?
The answer is it depends. If you have a high NRR but low GRR, you’re retaining your customers, but they’re not spending much money with you. On the other hand, if you have a low NRR but high GRR, you’re losing customers quickly, but those who stick around spend a lot of money.
Ideally, you want to have both high NRR and high GRR. But if you had to choose one to focus on, it would depend on your business model and goals.
For example, if you’re selling products or services with a long shelf life (software or subscription-based tools), then focusing on NRR makes sense because once someone buys from you, they’re likely to keep using your product for a while.
On the other hand, if you’re selling physical goods that need to be replaced frequently (think clothes or electronics), then focusing on GRR makes more sense because even though people might not buy from you every month, when they do make a purchase, they’ll probably spend more money.
Choose your combination for net retention vs gross retention accordingly!
Can net retention be lower than gross?
There are several reasons why your net retention might be lower than your gross retention. Maybe you have a high churn rate because your product isn’t meeting customer needs, or you’re not doing enough to keep existing customers engaged. If your net retention is lower than your gross retention, it must be addressed as soon as possible.
Since it’s the high time to use tools to draw the right calculations on net retention vs gross retention. Once you have the precise calculations, you can devise a strategy to maintain a perfect balance for net retention vs gross retention that works perfectly for you.
Net retention vs gross retention—What is more critical in SaaS business?
As a SaaS business, it is essential to focus on net retention because it is a key metric for predicting future growth. Net retention is a more accurate measure of customer satisfaction and loyalty because it considers both new and lost customers. A high net retention rate means that your customers are happy with your product and stick around for the long haul.
Investing in strategies to improve net retention can significantly impact your bottom line. For example, increasing your net retention rate by just 1% could mean an extra $1 million in revenue each year!
In the competition of net retention vs gross retention—why is net retention more important? Because it’s a measure of customer loyalty. Customers who stick around despite having the option to leave are more likely to be loyal and advocate for your brand. They’re also more likely to upgrade to higher-priced plans as your company grows.
That’s not to say that gross retention isn’t important—it is! After all, if you can’t keep your existing customers active, you won’t have any new ones to replace them. But if you want to measure customer loyalty and growth potential, net retention is the way to go.
Tracking net retention vs gross retention isn’t just an end in itself. Still, it plays an important role in enhancing customer and revenue retention.
Churnfree helps you automate the calculation process to encourage customer retention and boost revenue retention. See a live demo of how it helps you decide on net retention vs gross retention for your business. Knowing the right churn rate is helps you know how many customers are leaving, but choosing between net retention vs gross retention helps you bring them back and retain the existing customers for a longer period.
Churnfree does the calculations for you according to your needs. Once you know the right results on net retention vs gross retention, you can know how to increase customer and revenue retention and help you make the best business decisions.