About a week ago we published a blog about Net Revenue Retention (See post here). While Net Revenue Retention (NRR for short) is a helpful metric for understanding the performance of a SaaS business it can paint an incomplete picture. Today we want to cover a complimentary metric, Gross Revenue Retention (GRR for short), what each one tells you, and how when combined together they can paint a more complete picture of the health of a SaaS business and their revenue stream.
First, NRR vs. GRR, what is the difference? As we discussed last week NRR is the revenue left over from your customers over a given time period after you take out churn and downgrade revenue and add back in any upgrade revenue over a set period of time. Here is the formula for NRR:
NRR = (Renewal MRR + Upgrade MRR - Churn MRR - Downgrade MRR) / Beginning MRR
Gross Revenue Retention follows a similar formula only it does not take into account upgrade revenue, the formula for GRR is as follows:
GRR = (Renewal MRR - Churn MRR - Downgrade MRR) / Beginning MRR
By taking out upgrade revenue (revenue from existing customers that you up-sell and cross-sell to) GRR can never be more than 100%. If a subscription business achieves 100% GRR that means every-single customer over that given time period renewed at the same MRR. NRR can and typically is over 100% because you are able to incorporate upgrade revenue to cover the losses of your churned and downgrade revenue. Many of the top SaaS businesses that have gone public (Salesforce, Shopify, HubSpot, etc.) have NRR above 100%. The reason having a NRR above 100% is viewed as valuable for subscription businesses is that it means the business is able to grow it’s revenue stream from it’s existing pool of customers, it is also a sign that you have a sticky product or service as customers who upgrade typically are less likely to churn.
While having a 100%+ NRR is a great sign for a scaling subscription business, it doesn’t give us the complete picture which is where GRR comes in. For most subscription/ SaaS businesses the key is to keep the gap between NRR and GRR as narrow as possible. For example, you have two SaaS startups with the same monthly revenue, one with a NRR of 102% and GRR of 95%, and a second with a NRR of 110% and GRR of 85% annually. If one had only examined Net Revenue Retention they would look more favorably on the second company since they are able to “Net” 8% more revenue from their customers each year. But once you analyze Gross Revenue Retention you realize they are loosing 15% of their revenue each year while company one is only loosing 5%. The concern with company two is that despite strong short-term NRR, they are covering up much higher churn with upgrade revenue. For the second company, over time, all the bad/poor fit customers will all churn off and all of the good fit customers will have been upgraded and you will see your upgrade revenue dry up and your NRR will plummet. The term we have for this is a “false bottom” because the base or pool of candidates you have to up-sell too will eventually give out.
Now all of this assumes everything else between the two businesses remain the same, obviously this doesn’t all happen in a vacuum and having low GRR and wide NRR-GRR gap isn’t the end of a startup. If company two is aware of this metric and takes the time to understand their customer base and see which segments or groups of customers are contributing most to churn they can make the necessary adjustments to address it. Operational initiatives for the marketing and sales team to better target the better-fit customers who will be less likely to churn. Couple that with customer success initiatives to engage these high fit customers and you should see the NRR-GRR gap shrink.