Gross Revenue Retention

What is Gross Revenue Retention?

Gross revenue retention (GRR) calculates total monthly recurring revenue (excluding expansion revenue) minus revenue churn from customers leaving or moving to lower-priced products, expressed as a percentage. Since it doesn’t account for upsells, cross-sells, and upgrades, GRR only measures a company’s ability to retain existing customers.

GRR is similar to customer retention (the two are pegged to the same time frame). But it’s a more accurate (and complicated) reflection of your company’s health because it measures actual cash flow. While your customer retention rate measures the percentage of customers who continue to do business with you, GRR shows the actual impact of customer loyalty on your bottom line.

As an example, suppose SaaS Company A has a churn rate of 5% and SaaS Company B has a churn rate of 10%.

• Company A’s customer base has largely remained intact, but it has lost several enterprise customers, which comprised almost 25% of the company’s income.
• Company B lost a significant portion of its lower-tier and freemium customers when it repositioned its product, but its major accounts have continued to happily use its service.

On the surface, Company A looks more well-off since its churn rate is so low (5% is fantastic). But when looking at GRR, Company B’s figures may be stronger. Because Company A has lost several high-value customers, the total revenue loss is much more significant.

Company B, on the other hand, has a higher churn rate. But it’s largely due to lower-tier customers leaving, so it doesn’t impact its bottom line as much.

Synonym

• GRR

Why Tracking Revenue Retention is Important

Revenue retention is an important metric for companies of all sizes. But, it’s especially useful for startups and small businesses that are still trying to reach product-market fit, as it can help them identify where they need to improve their products or internal processes.

Let’s look at a few reasons to track revenue retention:

Analyze Customer Retention

On their own, customer retention figures can be slightly misleading. For instance, while a customer may renew their contract with you, they may also end up downgrading to a lower-priced product. This means that your retention rate will remain high, but your revenue retention figures (and ultimately, your bottom line) won’t be as impressive.

Since revenue retention measures the financial value of your customer base, it adds context to customer retention rates. While improving customer loyalty is certainly important, it requires a revenue-focused approach. Otherwise, a company may incorrectly believe it is healthy or unhealthy based on retention alone.

Identify Reasons for Customer Churn

In a perfect world, a company’s churn rate equals zero. Of course, there are plenty of reasons for churn outside a company’s control.

The ‘ideal’ rate is somewhere between 2% and 8%. But, even if your company falls within that threshold, it’s worth looking into why customers are leaving. If they’re all leaving for a similar reason, that’s a problem worth fixing.

When a company is losing revenue at an equal or higher rate than it’s losing customers (which they would only know by looking at revenue retention), they’re disproportionately losing their most valuable ones. The revenue retention rate is also a useful metric in these cases — companies can use it to develop retention strategies for their most valuable customers.

In any case, revenue retention is the call-to-action for busiensses to look more closely at the reasons behind customer churn. When they see a less-than-satisfactory number, that’s their sign to solicit feedback, test their product, and track usage data to find common problems.

Measure and Track Monthly Recurring Revenue Growth

With GRR, it isn’t just about focusing on the right customers for the product. Companies still need to close enough deals to be profitable.

Because GRR isolates sales and marketing activities, it’s also the perfect metric for tracking revenue growth from a new customer acquisition standpoint. A company can identify the effectiveness of different sales strategies and campaigns by monitoring changes in their GRR numbers month-to-month.

Knowing your GRR gives you a holistic view of your customer base and how it’s changing over time. If you attribute growth to certain strategies, campaigns, and activities, it also helps you accurately measure the financial impact of the decisions you make.

Proactively Improve Revenue Retention 

GRR doesn’t account for the additional revenue created through upsells and cross-sells. That means organizations using it are able to isolate the impact of their sales and marketing activities.

Retention activities aren’t the sole responsibility of the customer success team. Accountability for retention includes Sales and Marketing — two supporting functions that should be attracting and closing quality leads.

Emphasizing your ideal customer profile (ICP), positioning, messaging, and sales outreach strategy becomes crucial with GRR. Customers won’t stay long if they aren’t a good fit for your product, which makes it a valuable tool for eliminating a potential revenue retention problem before it even starts.

Gross Revenue Retention (GRR) vs. Net Revenue Retention (NRR)

The main difference between GRR and its counterpart, net revenue retention (NRR), is that GRR does not account for cross-sells, upsells, and upgrades while NRR does. In other words, GRR measures a company’s ability to retain its current customers. NRR reflects that company’s ability to retain and expand its customer base.

In terms of busienss strategy, a focus on GRR and a focus on GRR create different outcomes. It’s important not to concentrate too heavily on one over the other.

There are a few important things to remember when measuring GRR and NRR.

Uniform Experience vs. Tiered Experience

When focusing on NRR, a large customer expanding is considerably more impactful than a small customer taking a proportionally similar action. Customer segmentation is high on the priority list because higher-paying customers generally need (and expect) more attention.

A white-glove service for enterprise customers is the perfect example of this. Larger companies that deploy your product across dozens of business units and potentially thousands of employees should have dedicated account managers and support staff. Compared to an entry-level customer, they require more resources and a different approach that reflects their needs (and, by extension, value).

Solely focusing on GRR and customer loyalty causes companies to miss the mark in this regard. While the impact of losing a larger customer is certainly unequal, the impact of providing additional value goes unnoticed.

The benefit to GRR is it’s an easy metric to automate and track. The problem is a consistent experience across customer segments simply does not work for today’s customers.

Product Bundling vs. Product Excellence

Expansion within the customer base is one of the most sustainable ways to grow revenue. Most successful IPOs and acquisitions happen for companies with an NRR well above 100%.

But, relying to heavily on net revenue retention causes companies to overemphasize how they package their product. They add microservices and features that don’t necessarily need to be there to consistently increase revenue from upsells and cross-sells every year.

Since GRR only represents retention, each and every customer holds immense value. Busiensses focusing on this metric concern themselves with personalization and user experience. And they’re continuously soliciting and implementing feedback to improve the underlying product.

To develop the best product for their target market, companies need to use a healthy mix of the two. They need to create the additional features and services that satisfy current customers and capture new ones without forgetting what the product is meant to do (and what it does for most of their customers).

Focus on Growth vs. Focus on Scalability

Growth and scalability are both essential for long-term business success, but one often exists without the other.

Since segmentation is such a critical element of NRR, companies focusing exclusively on this metric sometimes fall into the trap of making decisions based on their largest customers’ needs. Fixating on a few customers’ satisfaction for the sake of retaining and better serving them limits scalability.

This isn’t to say enterprise customers don’t deserve additional attention. In fact, most companies with products serving enterprise customers offer entirely customizable versions of them (or, at the very least, custom tools and integrations).

But, the nearsighted “expansion at all costs” mentality takes a toll on the product and customer experience. And it makes companies increasingly reliant on fewer sources of income, a major red flag to investors.

Companies naturally build a more scalable product when every customer counts and they don’t deviate too much from the product roadmap. And that’s what GRR encourages them to do.

How to Calculate Gross Revenue Retention

Gross revenue retention accounts for revenue from customers that remain with the company from one month to the next. It’s calculated by taking the sum of total monthly recurring revenue (MRR) and subtracting any lost MRR due to cancellations, downgrades, or churn.

The gross revenue retention formula is as follows:

Gross Revenue Retention = (Starting MRR – Churned MRR – Downgrades) / Starting MRR

Let’s look at an example to illustrate gross revenue retention calculations.

Say a company starts the month with $100,000 in MRR and loses $10,000 due to churn. They lose an additional $2,000 due to downgrades.

Gross Revenue Retention = (100,000 – 10,000 – 2,000) / 100,000 = 0.88 or 88%

In this example, the company’s gross revenue retention for the month was 88%. They lost 8% of their MRR during that period.

Factors Impacting GRR

Gross revenue retention is largely impacted by the same factors that influence net revenue retention.

Product/Service Quality

Of course, no business can retain customers with a bad product. If customers don’t need your product or don’t have a good experience using it, they won’t stick around for the long haul.

The inverse is also true: The better your product experience, the more likely customers are to stay loyal and opt into additional features and services (leading to increased NRR and a smaller dent in GRR).

Pricing & Discounts

It’s not uncommon for businesses to use penetration pricing to encourage customers to upgrade or add services. Many companies also use differential pricing to improve accessibility for certain groups (e.g., a student discount).

Ideally, such pricing strategies should be structured in a way that rewards new customers without punishing loyal ones. If done correctly, this can help boost GRR numbers while simultaneously keeping churn low.

Customer Satisfaction

Customer satisfaction is the Holy Grail of retention. It goes without saying: happy customers will use your product as long as they can.

It all comes down to how well a product meets customers’ needs and expectations. Providing regular updates, responding quickly to customer inquiries, and delivering a personalized customer experience are all essential for preventing churn and driving GRR consistency.

Lead Generation

Targeted marketing campaigns and sales prospecting happen before customers ever even use the product, so they’re the most critical from a customer-facing standpoint. Bad leads might convert, but they won’t stick around for long. They’ll realize the product isn’t for them and go elsewhere.

Poor sales and marketing targeting have a direct negative impact on GRR. On the flip side, targeting the right customers for your product improves the changes of customers continuing to pay from one month to the next.

Customer Success Strategy

Customer success plays a pivotal role in net and gross revenue retention. While they’re responsible for cross-selling and upselling (which aren’t important for GRR), they’re also there to help customers get the most value out of the product.

By providing personalized help and advice, customer success teams ensure customers use the product properly. When they get the results they’re looking for, they’re less likely to drop out.

Competition

The mere existence of others in the market guarantees at least some churn. They run marketing, outbound sales, and customer success programs just like you. At some point, a few loyal customers will eventually try new products and services.

Sometimes, this is through no fault of your own. Maybe a competitor offered a system integration you couldn’t. Maybe a new product is purpose-built for their niche. Or, maybe they just hired a killer sales rep who caught them at the right place and right time.

Ways to Improve Gross Revenue Retention Rate

Just like there are practically infinite ways to reduce churn, there are dozens of approaches organizations can take to increase GRR. But they all boil down to a few key factors: data, product, and customer experience.

Identify At-Risk Customers/Accounts

Companies with large volumes of customers can use predictive analytics and machine learning to identify at-risk customers before they churn. You can also flag customers who have exhibited signs of dissatisfaction (e.g., low product usage, poor reviews).

This is the first place you should look for GRR improvements. Customers at risk of churning are the most immediate threat to you GRR, and they’re also fixable in many cases.

Convert Freemium to Paid Users

Freemium is meant to let customers try before they buy. The whole point of it is to offer the most basic version of your product’s core features, which they will eventually familiarize themselves with and realize they need more.

Trello, for instance, offers its basic kanban-style project management tool for free. But users can’t add multiple team members, use all its templates, or access much of the app beyond that. It’s perfect for individuals who need to track their own tasks, but anyone working with multiple people (or looking for more advanced features) will have to upgrade.

If you have a lot of freemium users, you’re leaving tons of money on the table. Not all customers will convert to paid users. But a low freemium-to-paid-user conversion rate could indicate you’re offering too many features in the free plan. If that isn’t the case, then it’s a sign your customers don’t value your product enough to pay for it.

Focus on Account Expansion

Customer data is, in many ways, the most essentially part of every business function. In the context of GRR, it becomes even more vital as it tells your customer success team when to approach customers with expansion opportunities.

Key indicators, such as customer health scores, which consider factors like license utilization, product/core feature usage, customer engagement, and resource consumption, can trigger buying signals.

Although the direct impact of expansion (i.e., revenue) is a focus of NRR rather than GRR, the indirect result is retention. A successful upsell/cross-sell or voluntary upgrade means the customer plans to continue using the product. And, assuming that expansion adds value to them, it lengthens their lifespan as a customer.

Identify Problems in the Customer Journey

There are dozens of steps in the B2B customer journey:

• Awareness
• Consideration
• Decision
• Purchase
• Use and Expansion
• Advocacy
• Loyalty and Retention
• Exit

Examine your sales process, product experience, and ongoing support to identify points of friction. Avoid unnecessary steps in the purchase process (like a questionnaire or extra approvals) and personalize the customer experience with onboarding emails and tailored content recommendations.

Improve Customer Satisfaction

Happy customers won’t churn if they can help it. Make sure customers get the full value they expect from the product and customer service, and you can significantly drive up your retention rate. You need to continuously monitor customer feedback, identify problems promptly, and take action to resolve them quickly.

As part of your initiative to improve customer satisfaction, use surveys to calculate a Net Promoter Score (NPS). Create a benchmark for it and track it over time.

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