With all the acronyms being thrown about, you may be left wondering which SaaS metrics are the best indicators of performance? Which ones do investors focus on? Christina Ross, CFO turned CEO/co-founder of Cube, not only analyzes these metrics for her own business, but brings decades of finance experience to the task of automating and optimizing strategic financial planning and analysis for other companies.
In this blog series, we’ll hear firsthand from Christina about how to calculate and interpret the most helpful measurements of enterprise software success. To start off, we asked her about two metrics that help businesses measure customer retention and growth: gross revenue retention and net revenue retention.
At a high level, what is revenue retention and why does it matter?
CHRISTINA: Revenue retention is a measure of how much revenue a business keeps from the same customer base over a certain time period. You can track it by month, quarter, year, week, or even day.
One important note is that revenue retention only refers to existing customers. Acquiring a new customer—and the associated revenue they bring in—can be 5 to 25 times more expensive than retaining one (in terms of time, resources, and finances). Thus, revenue retention is a good measure of sustainability and profitability. Customers with reliable revenue retention have a stable runway and are more profitable in the long run.
Can you get the same insights by tracking customer or logo retention?
CHRISTINA: Not all customers are created equal. One customer might constitute 30% of a company’s revenue while another just makes up 0.05%. Losing any customer hurts, but those that represent a greater share of revenue will hurt a lot more. Tracking revenue retention alongside customer retention can help you get the full picture, especially when you look at both gross revenue retention (GRR) and net revenue retention (NRR).
What exactly is gross revenue retention (GRR) and why is it important to track?
CHRISTINA: Gross revenue retention is the percentage of revenue a business retained from the start of a specific period. It shows how successful you’ve been in retaining customers at current price points or contract values.
GRR = (MRR – Churn – Contractions) / MRR
MRR is your monthly recurring revenue at the start of the month, churn is the amount lost (in dollars) to customers who are no longer customers, and contractions is the amount lost from customers who downgraded to a less expensive plan. Even if you earn new sales or upgrade revenue in a given month, this formula looks only at revenue retention as opposed to acquisition. The closer GRR is to 100%, the better. That said, this depends on your customers’ size, since higher churn is often expected from SMBs.
If GRR is low, it could signal a few problems with your business’ health. For example, you might not be solving the right problem. People won’t stick around if the problem you’re solving is too small to warrant your price for the solution. Other issues might be that your customer experience is frustrating, or your customers simply don’t use the product enough. If people only log in once a month, you’re not building trust or loyalty with them.
How is net revenue retention (NRR) different?
CHRISTINA: GRR doesn’t account for new customers or expansions. It only looks at what you started with and how much you’ve lost, while net revenue retention (also known as “net dollar retention” or NDR) is the total change in recurring revenue. It tracks both your business’ ability to retain and acquire revenue from existing customers.
NRR = (MRR + Expansions – Churn – Contractions) / MRR
As you can see, what’s different here is that we’re accounting for expansions, or the new money a group of customers have spent with your business. Even though NRR is a growth indicator, it’s still a retention metric, so we don’t include new sales. NRR measures how well a business’ cross-sell and upsell strategies are working.
Experts say a good median NRR for private companies is 104%, and generally NRR > 100% indicates growth, while NRR < 100% indicates decline. Businesses with high NRR are offering the right things customers need as they grow. On the other hand, when NRR is consistently low, this should sound alarm bells. It could mean the company isn’t offering the right upgrades to incentivize customers to move up the value ladder. Maybe the customer success experience is frustrating, or there’s not enough brand loyalty to prevent switching.
What does the combination of GRR and NRR tell us?
CHRISTINA: The best insights come from cross-referencing NRR and GRR. SaaS companies that have both high GRR and high NRR are in a great place and can focus on acquiring new customers. But if you have high GRR and low NRR, it means you’re good at keeping customers, but need to get better at selling to them again, perhaps by rethinking the upgrades you’re offering. And if you have both low NRR and low GRR, there are likely some larger underlying issues that need to be addressed quickly. This might require you to radically invest in customer support or take a hard look at the problem you’re trying to solve.
If there’s a problem with GRR or NRR, how can we improve these metrics?
CHRISTINA: At the end of the day, people are the ones who make the decision to churn or not. So while we might calculate revenue retention metrics separately from customer churn, in practical terms, there’s no separating them. When it comes to increasing GRR, the best strategies focus on keeping your customers involved and happy—improving the overall customer experience, building trust, or adding more integrations.
Much of this will indirectly improve NRR as well, because it reduces churn and contractions. If you want to double down on NRR, focus on expansions—improving customer service, refining your value ladder, or adopting a customer expansion strategy. All of this can be informed by cohort analysis, which might help you hone in on what you need to do to better support the specific customer groups that are responsible for the majority of your churn.
Of course, don’t forget that these revenue metrics only look at existing customers, so it’s best to combine them with other KPIs for a full picture of what’s happening in the business. GRR doesn’t account for any growth and NRR may obscure and cloak a churn problem. To learn more about these and other important SaaS metrics, check out our recent blog post on GRR and NRR.