If there’s one SaaS metric you should monitor religiously—especially as you move from initial growth mode to scale-up mode—it’s your churn rate.
After all, churn rate is intuitive to understand—it’s the percentage of customers that you’ve lost over any specific period of time. And, of course, the lower this percentage, the better.
That said, your churn rate doesn’t show you the whole picture when it comes to its effect on your recurring revenue. The revenue coming through your payment gateway would see a bigger reduction if a big-ticket enterprise customer cancels vs. a customer on your cheapest plan—even though each will show up in your churn reports as one canceled customer.
So, to understand the impact of churn on your revenue, you’d need to look at your net revenue retention (NRR) and gross revenue retention (GRR).
Broadly speaking, these two metrics measure the amount of revenue you’ve retained—that is, the revenue you didn’t lose to churn—over a time period.
However, what each of these key business metrics considers to be “retained revenue” differs. As a result, they provide different insights into the success of your revenue retention efforts.
Let’s dive into what exactly NRR and GRR are, how to choose which metric to focus on, and how your billing process and subscription billing system can help you keep track of each.
NRR vs. GRR: what’s the difference?
GRR is the percentage of revenue your subscription business has retained over a certain period, but it excludes expansion revenue, such as revenue from cross-sells and upsells.
GRR is calculated using this formula:
GRR = (Total revenue - Total churn) / Total revenue x 100%
At best, your GRR number would be 100%, indicating you experienced zero churn during that period. It's a useful metric for measuring your success in purely retaining customers. But to evaluate your ability to farm customers, you’d need to look at your NRR.
NRR takes into account not just your churn revenue for a certain period, but also your expansion revenue. Here’s how you’d calculate it:
Net revenue retention = (Total revenue + Expansion revenue - Total churn) / Total revenue x 100%
The higher your NRR, the better you're doing both retaining your customers and growing their value to your business.
NRR gets most of the love
Unlike GRR, your NRR can exceed 100%.
In fact, publicly listed SaaS businesses love to reveal their high, 110%+ NRR figures, and SaaS industry analysts love to gush over them.
Just take the commentary on the NRR of these businesses by SaaStr’s Jason Lemkin:
- GitLab, with 148% and 152% NRR as of January 31, 2021, and July 31, 2021, respectively: “These are truly top-tier numbers”
- Snowflake, with 162% NRR as of Q3 FY21: “A great benchmark for developer-centric mission-critical services”
- UiPath, with 145% NRR as of January 31, 2021: “Top-tier for B2B enterprise software”
On the flip side, GRR tends to get less publicity.
In a Medium blog post, Sammy Abdullah, managing director and co-founder of Blossom Street Ventures, wrote about 59 SaaS businesses that shared their NRR when they went public.
Of these 59 businesses, however, only 11 of them also disclosed their GRR.
That’s not to say that their GRR figures were poor—the average GRR was a fantastic 95%, with the lowest being 88%.
Should you focus on NRR or GRR?
With all the buzz around NRR, it’s easy to jump on the hype train and think “focusing on NRR is definitely the way to go!”
But not so fast.
Focus on GRR if your business is new
NRR is a measure of growth. And before you even think of growth, it’s a good idea to get the fundamentals right.
In other words, for a new SaaS business, your focus should be on finding a perfect product-market fit to attain a high GRR. After all, if customers don’t find your product useful, they might not continue to be your customers—and contribute to your GRR—for long, never mind getting them to upgrade and boost your NRR!
But as your business matures, be prepared for that GRR number to go down.
Lender SaaS Capital shares in a 2021 B2B SaaS Retention Benchmarks report that SaaS businesses younger than three years old tended to report a median GRR of 99%.
After the three-year mark, however, the median GRR dropped to 90%, which SaaS Capital believes is due to customers having the “chance to churn.”
Investors may prioritize GRR over NRR
Additionally, if you intend to seek funding, expect investors to scrutinize your GRR.
Between two SaaS businesses with the same high NRR, investors may be less likely to invest in the one that has a lower GRR. Understandably, it’s a riskier move to entrust large amounts of funding to a business with a poor retention rate.
Abdullah provides insight into why some growth equity and venture funds prioritize GRR over NRR.
“Their view is that so long as you’re not losing customers, they can teach you how to upgrade those customers,” he writes. “Whereas if gross dollar retention is low, [retaining customers] is a much harder problem to solve.”
With your GRR secured, shift your focus to NRR
After your subscription business has found its footing and boasted a credible GRR for some time, you can safely shift priorities to growth—and NRR.
As SaaS Capital reports, there is a strong correlation between NRR and growth rate. In fact, SaaS businesses with 100%+ NRR tend to also enjoy growth of 40%(!) or higher.
So how can you raise your NRR? Tim Kopp, chairman and CEO of marketing platform Terminus, shares three insights from his experience increasing Terminus’s NRR by more than 30 points over two quarters:
- Manage acquisition and retention holistically instead of treating them as separate functions,
- Implement processes that emphasize retaining existing customers over acquiring new ones, and
- Learn what your customers need, then develop your product to address these pain points and encourage higher product adoption.
The third point is especially important.
While you’re chasing growth, you need to continue ensuring good product-market fit—even though this may seem more like a strategy for improving GRR. Don’t forget that NRR and MRR go hand in hand to a point: if your customers feel that your product isn’t meeting their needs, they may churn rather than upgrade. Your NRR could accordingly take a beating.
“The term we have for this is a ‘false bottom’ because the base or pool of candidates you have to upsell to will eventually give out,” writes Ross Andrews of Talkin' SasSy.
Grow your NRR and GRR with a modern recurring billing system
Regardless of whether NRR or GRR is the priority for your recurring billing business, track both metrics closely. This way, you’ll know whether your strategies are working, and can fine-tune your efforts as you go along.
A holistic subscription management platform is more than simply a subscription billing solution. It captures a lot of insights from the payment process and offers numerous reports you can take advantage of for strategic decision-making.
It can help you monitor your business’s expansion, contraction, and churned revenue in real-time. By generating the relevant reports on your recurring payments, you’ll have all the data you need to calculate your NRR and GRR percentages in a flash.
With deeper insights into these metrics, you can then take data-driven measures to increase your retention and expansion revenue—and accordingly, your NRR and GRR.
And of course, NRR and GRR aren’t the end of the story.
From ACV to LTV, and CAC to MRR, comprehensive recurring billing systems can help you stay on top of the whole alphabet soup of SaaS metrics—not to mention streamline activities like revenue recognition, experimenting with pricing models, and managing payment gateways that allow you to accept online payments.
No matter which stage of growth your SaaS business is at, your subscription billing software is your trusted partner in keeping it in the pink of (financial) health.