The importance of Net Revenue Retention and Gross Revenue Retention in SaaS

Understanding the significance of net revenue retention in SaaS metrics is crucial for the growth and sustainability of a SaaS business.

What is Net Revenue Retention and why is it important?

Net revenue retention (NRR) measures the ability of a SaaS business to retain and grow its existing customer base. It is the cumulative total of retained, contracted and expanded revenue over a set period, usually one month or one year. NRR calculates (including expansion revenue) minus revenue churn (contract expirations, cancellations, or downgrades).  It measures your company's ability to retain and expand its customers.

Anywhere above 100% is considered a good NRR rate because it indicates growth via a consistent customer base and low churn rate.

NRR should be tracked alongside of GRR, and not in isolation. For example, a high NRR rate may mask high customer churn that will be visible with a GRR rate that has been decreasing month on month. 

Differentiating Net Revenue Retention and Gross Revenue Retention

While net revenue retention focuses on the revenue retained from existing customers, gross revenue retention (GRR) measures revenue solely from customer retention. GRR calculates total revenue (excluding expansions and upsells) minus revenue churn (contract expirations, cancellations, or downgrades). 

GRR is always less than 100%.

Benefits of Net Revenue Retention for SaaS Businesses

Net revenue retention is a valuable metric for SaaS businesses due to the following benefits:

- It helps identify the health and growth potential of a SaaS company's existing customer base. By measuring the revenue retained from existing customers, businesses can assess their ability to upsell, cross-sell, and retain customers, which are key drivers of sustainable growth.

- It provides insights into customer satisfaction and loyalty. High net revenue retention indicates that customers are not only renewing their subscriptions but also increasing their spending, which signifies a strong relationship and satisfaction with the product or service.

- It aids in identifying upsell and cross-sell opportunities. By analysing the revenue generated from upsells and cross-sells, SaaS businesses can identify potential areas for expansion within their existing customer base and develop targeted strategies to maximise revenue.

- Notably, Software Equity Group have shown in their Net (Annual) Recurring Revenue Retention Wave that “few metrics have a more demonstrable impact on SaaS company valuation multiples than net dollar retention.” 

Strategies to Improve Net Revenue Retention

Improving net revenue retention is crucial for the long-term success of a SaaS business. Here are some strategies that can help achieve this:

- Enhance customer onboarding: A smooth and comprehensive onboarding process can help customers understand the value of the product or service, leading to higher satisfaction and retention rates.

- Provide exceptional customer support: Offering prompt and effective customer support can greatly enhance customer experience and increase the chances of retaining them in the long run.

- Regularly engage with customers: Keeping customers engaged through personalised communication, product updates, and relevant content can foster a sense of loyalty and encourage upsells and cross-sells.

- Recognise when customers need more: Training your customer success team members to inquire about the business problem their customers are trying to solve shows empathy beyond the technical help or "how to". It also may invite a conversation with the customer about your product's features and use cases and potentially lead to their decision to purchase additional features or more access for other members of their company.  

Strategies to Improve Gross Revenue Retention

While net revenue retention focuses on existing customers, improving gross revenue retention involves strategies to acquire and retain new customers. Some effective strategies include:

- Focus on customer satisfaction: High customer satisfaction is directly linked to better GRR (and an improved Net Revenue Retention Rate). To ensure that customers derive continuous value from the product or service, regularly solicit and act on customer feedback to enhance customer satisfaction and loyalty.

- Develop tailored customer experiences: Customising experiences to meet the specific needs and preferences of different customer segments significantly improves gross and net retention. Personalisation strategies demonstrate an understanding and appreciation of customer needs, fostering stickiness.

- Create a community: Humans are social creatures and by nurturing, moderating and championing a community among your customers will enable them to share things they like about your product and company, and things that can be improved as a group. If the popular items that surface within the community are acted upon quickly by your company, then you can prevent a customer who may be thinking about leaving from doing so. 

- Encourage customer learning: By having an extensive. easy to use and intuitive self-help knowledge base your customers become more invested in your product and may be more willing to overlook features which are not present but planned in the future - thus retaining their loyalty and subscription. 

Share your favourite strategies:

Share your favourite successful strategies to increase NRR and GRR in the comments.