"Growth at all costs" is no longer the mantra in tech. Today, the real winners achieve sustainable growth. If you're running a SaaS or subscription-based business, you live and die by retaining and expanding customer accounts. Without a good measure of how your core business is expanding and contracting, your startup could find itself in serious financial trouble you didn't expect—especially when new business slows down and sales cycles get longer.
All SaaS businesses track basic revenue metrics like monthly recurring revenue (MRR) and annual recurring revenue (ARR), but they don't tell the whole story. If you're only tracking MRR or ARR, and new customer acquisition is strong, it's easy to miss critical issues with customer churn and contraction.
What's more, MRR and ARR alone won't convince potential investors that your business healthy and your customers are happy. Many investors see a different revenue metric as the most important indicator of startup success and long-term growth potential.
Net revenue retention (NRR) is one of the best measures of a sustainable SaaS business and therefore a very powerful SaaS metric. It provides a clearer picture of potential SaaS growth compared to baseline recurring revenue figures.
If you're new to revenue retention metrics, you've found the right place to get your footing. By the end of this post, you'll understand:
Revenue Retention Explained
Revenue retention is the revenue generated from the previous month’s (or year’s) customers, which is distinctly different from customer retention in SaaS.
Let's say for example, your SaaS startup retained all of its customers last year, but they all downgraded to lower plans and spent less compared to the previous year. In this scenario, your revenue retention is lower while your customer retention is 100%.
High revenue retention rates indicate you are driving repeat business from your existing customers, and that you are not losing too many users along the way. It also shows that, for any customers you lose, you’re able to acquire more to take their place.
It's easy to see why revenue retention, in particular NRR, is the most important SaaS metric in the eyes of most investors. If you have good product-market fit, competitive pricing, and excellent customer service, you should also have high revenue retention.
NRR vs. GRR
There are two ways to measure revenue retention: net revenue retention (NRR) and gross revenue retention (GRR). Unlike NRR, GRR does not include expansion revenue from existing customers, such as upgrades and cross-sells. We'll explain each metric separately so you can fully understand the difference.
What is GRR?
Gross revenue retention (GRR), or gross dollar retention (GDR), measures the percentage of recurring revenue you retained in a given time period from your existing customer base. Put simply, it shows how well the business can keep the revenue it's currently generating.
Gross Revenue Retention (GRR) Formula
GRR Rate = 1 - [MRR- (Churnned MRR + Downgraded MRR) ÷ MRR]
GRR rates will be between 0% and 100%. The more optimized your business processes are, and the closer your ratio gets to 100%, and the better chance you have of maintaining a healthy company growth rate.
As GRR gets lower and lower, you're business is likely to fail if you do not identity and address the fundamental problems that are causing substantial churn. Investors will also lose interest fast if your GRR is too low.
Points to note:
GRR will always be less than 100%
GRR must always be equal to, or less than, your NRR
MRR for each individual customer in the current month must not exceed the MRR for that customer from one year ago
What is NRR?
Net revenue retention (NRR), or net dollar retention (NDR), looks at the net revenue left over from your existing customers in a set time period. It takes into account the total revenue minus any revenue churn (caused by departing customers, or customers who have downgraded) plus any revenue expansion from upgrades, cross-sells or upsells. NRR can be calculated at any time but is usually looked at on an annual or monthly basis.
Net Revenue Retention (NRR) Formula
NRR rate = | MRR (or ARR from the start of the period) + Expansions + Upsells - Churn - Contractions | x 100 |
| MRR (or ARR at the start of the period) | |
When NRR is high (over 100%), it indicates you have a quality product that's meeting your customers' needs. The higher your NRR rate, the more attractive your business is to investors, too. When NRR is low, it's time to take a serious look at who's churning out and why.
Functionally, NRR shows what your business would look like if it stopped acquiring new customers. With NRR over 100%, your business can still grow without new customers—that is, the company generates additional revenue from its existing customer base via upgrades and upsells, even when you factor in downgrades and cancellations.
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Extracting Insights from SaaS Revenue Retention Metrics
Though NRR tends to get more attention from outside investors and analysts, both revenue retention metrics are useful for gaining a full and balanced picture of the health of your business.
NRR, a broader measurement of revenue retention, factors in all the data to give you an accurate view of your company's growth outlook. If your growth rate is high, this is often a better measurement than GRR. If your SaaS business is implementing successful strategies for customer account growth and service expansion, you should expect your NRR to be high.
GRR is advantageous in that it measures the longer term health of your business. By excluding expansion revenue, you can see how your churn is affecting your startup's ability to grow, since you can't upsell churned customers. If GRR is high, you should have a sticky product and satisfied customers.
When analyzed together, NRR and GRR can reveal more about how successful customers are with your product and provide deeper insights that help you pinpoint what isn't working in your business.
For example, if your business has NRR of 120% and GRR of 90%, you can see at a glance that the company is financially stable with steady growth. If your NRR is the same, 120%, with GRR of only 40%, your business growth is weaker and less predictable within your existing customer base.
The good news is, by looking at both NRR and GRR you can quickly identify red flags and begin working to plug leaks in your core product and support experiences that are contributing to churn. Ultimately, you'll improve your revenue retention rates and most likely increase customer lifetime value, too.
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