Have you ever heard a C-Suite executive say that he/she is okay with losing out on a few customers every month? Never. The reason for that is customer retention is highly crucial for SaaS companies because –
- Retaining a customer is a better thing to do than acquiring new ones.
- Loyal customers contribute a lot to revenue growth in upsells, referrals, and even advocacy.
Apart from focusing on retaining existing customers, SaaS companies need to concentrate more on their churn ratio. This is where customer retention plays a crucial role in B2B SaaS companies.
What is customer retention?
Did you ever come across a SaaS business owner saying that they are ok losing old customers? No right! This is because customer retention is important, even more than making new customers.
Customer retention is a parameter that evaluates customer loyalty. It is also an important factor that reflects the organization’s ability to keep customers over time. Consumer retention can represent or forecast customer satisfaction, emotional attachment to the brand, repurchase behavior, and customer involvement.
Loyal customers contribute to the business growth through upsells, advocacy, and recommendations.
Given the importance of customer retention to a business, it is important to know how to calculate customer retention.
Like what you are reading?
Sign up for our newsletter
How to calculate customer retention?
When accessing customer retention, two questions come into the picture – the first is “How much money you are able to retain?”, and the second is “How many existing customers are you retaining?”.
The answer to the second question, i.e., “How many customers are you retaining?” lies in the key metric like Customer Retention Rate or the Logo Retention Rate.
But, for the sake of justification to the topic selected by us today, let us concentrate on the first question and the answer to that question. Retention of revenue over a period of time is calculated in terms of Gross Revenue Retention (GRR) and Net Revenue Retention (NRR). Let us understand these metrics in little detail.
Gross Revenue Retention (GRR) (Definition)
Gross Revenue Retention, in simplest terms, is the ability of a business to retain its existing customers. A business retains revenue when it retains its customers. In other words, the percentage of customers that a business is able to retain at the existing price point or the contract value is called its Gross Revenue Retention.
Unlike the Net Revenue Retention, the Gross Revenue Retention does not account for revenue earned due to expansion, upsells, and cross-sells. However, it includes any downgrades or cancellations of subscriptions or contracts.
GRR is the measure of recurring revenue from existing customers; hence it is also commonly called Gross Renewal Rate. It is calculated by subtracting the value of renewed contracts or subscriptions at the end of a period from the total value of contracts or subscriptions due for renewal at the beginning of the period.
Net Revenue Retention (NRR) (Definition)
The Net Retention Revenue (NRR) is a method of accessing customer retention by taking the total revenue earned, including any revenue earned through upselling or cross-selling, and subtracting its revenue churn.
NRR measures the total value of your renewed contracts as well as the revenue gained through upsells and cross-sells. It is possible to calculate your NRR on a monthly or annual basis, which is completely dependent on your needs.
Here is how you calculate NRR
- Add the value of your renewed contracts + expansion and cross revenue
- Divide by total value of contracts that were up for renewal,
In a Saas business, a Net Revenue Retention Rate >100% is a good growth Indicator. For SaaS companies selling into Small and Medium Enterprises (SMB), anything over 90% is a good NRR whereas, for Enterprise SaaS, 125% is considered a good NRR.
In this blog, we will focus only on gross revenue retention.
Formula to calculate Gross Revenue Retention rate
The Gross Revenue Retention rate, as you know, is the rate of existing customers retained during a given period. It can be calculated using the below formulae: –
GRR = (MRR start – Churn – Contraction) / MRR
MRR start here stands for Monthly Recurring Revenue at the starting of the month. This can be the recurring revenue at the begging of any period for which we need to calculate the Gross Revenue Retention. We have used month here, because normally, SaaS companies need to calculate their revenue retention on a monthly basis.
Churn refers to the loss of revenue due to customers who canceled their subscription or ended their contract with the business. It is a complete loss of revenue.
Contraction refers to the loss of revenue due to customers who downgraded their subscription to a lesser expensive plan. It is a partial loss of revenue as the revenue from the customer has reduced, not ended.
An example of calculation of Gross Revenue Retention formula
Let us take a quick example for the calculation of GRR. Let us assume company xyz is a SaaS company with the following figures in their books of account –
- Monthly Recurring Revenue = $10,000
- New Sales = $ 1,000
- Expansion of existing customer = $ 1000
- Customer Churn = $ 500
- Customer Downgrades = $ 500
GRR = (10,000 – (500 + 500)) / 10, 000
= 0.9 i.e., 90%
As discussed earlier, new sales and expansions have not been taken into account here. After the calculation, we see that GRR for XYZ SaaS company is 90% which means that the company had successfully retained its 90% revenue from existing customers.
What does Gross Revenue Retention tell us?
Gross Revenue Retention simply tells how happy the existing customers of the company are. The higher the retention rate, the happier the customers are. It is a stability indicator for any SaaS company. If a company has a good retention rate, it has a stable position in the market.
What can be considered as a good gross revenue retention benchmark?
The standard benchmark may vary from sector to sector. However, the closer the GRR to 100%, the better health it indicates for the company.
Importance of tracking Gross Revenue Retention for a SaaS company
As told earlier, Gross Revenue Retention is a stability indicator for any SaaS company. It shows how much revenue the period began and how much has been lost at the end.
SaaS companies track GRR as it tells how much customers have broken the ties or made the bond weaker from the company. A higher loss of customers may indicate issues with customer success. Drop-in revenue retention indicated by GRR can alert the company to find any underlying issues like bad customer success strategies, frustrations among the customer, frequent glitches in the SaaS product, or anything else that can break customer loyalty.
Ways to improve Gross Revenue Retention for a SaaS company
As a matter of fact, you cannot directly control your Gross Revenue Retention as it is your customers who would be the final decision-makers. However, you can influence your customers’ decisions in many ways and prevent them from canceling or downgrading their contracts with you.
You can try the following tips to improve your GRR –
- Improve the overall experience of your customers
- Build trust in your brand and your product
- Add more value to your product to make it more valuable to your customers
- Don’t meet your customers’ expectations; exceed them
- Have an active customer success team
Retaining existing customers is the core objective of a SaaS company to drive more profits and remain sustainable for a pretty long time. A high Gross Revenue Retention rate indicates that your product represents a strong value proposition for your customers. This can also be termed as a “sticky” product.
Maximizing your Gross Retention Rate is a key parameter indicating the profitability of your B2B SaaS business. At the same time, you want your GRR to be as high as possible. The maximum it can get is 100% (next to impossible after several years of business).37
Some customers might churn, which is not in your control. It is, however, important for you to scrutinize the reasons for the churn and segment it into avoidable and unavoidable. So, effective steps can be taken in the future.
Stanley Deepak is an accomplished sales and marketing professional with 15+ years of experience. He loves tech products and book reading. He writes on philosophy and culture on LinkedIn.
Published February 09, 2022, Updated February 09, 2022