You can gain deeper insight into your growth and success metrics by understanding gross vs. net retention. In this blog post, we will describe what they are, how they differ and how to calculate and use them.

What is gross retention (GRR)?

After accounting for customer churn and downgrades to lower-priced products, Gross Revenue Retention (GRR) measures how much monthly recurring revenue a business retains each month. This gives you insight into overall revenue stability within the existing customer base, excluding any upsells or expansions.

In essence, GRR measures how well a company retains its customers and prevents revenue leakage from churn or downgrades. Businesses can track GRR to determine whether they can maintain a consistent customer revenue stream.

How to calculate GRR?

GRR = [(MRR from renewals – MRR lost due to churn – MRR lost due to downgrades) / MRR at the beginning of the month] * 100

To use this formula, divide your monthly recurring revenue by customers who renewed at the end of each month, minus any revenue you lost because customers churn, then divide that by your monthly recurring revenue at the beginning of the month. Turn the result into a percentage by multiplying it by 100.

It is important to isolate your recurring revenue without including growth considerations as this helps determine how well you're maintaining your current revenues. In this way, it is possible to determine the expected revenue for the long term without taking into account increased customer spending. As an early warning system, it also highlights the impact of customer churn or downgrades. You can take proactive measures to prevent long-term revenue risk by estimating the customer lifetime value.

What is net revenue retention (NRR)?

Net revenue retention (NRR) measures a company's ability to stay in business with its existing customers. Because it accounts for changes in revenue from upsells, expansions, and churn, NRR is a more comprehensive metric than gross revenue retention (GRR) or customer retention.

How to calculate NRR?

NRR = (Net recurring revenue - Monthly recurring revenue (MRR) lost from churned customers - MRR lost from downgrades + Revenue from upgrades) / (Base recurring revenue) * 100

To use this formula, take the net increase in revenue from the existing customers at the end of a specific period and divide it by the beginning of period revenue. 

During the period, NRR takes into account new customers, price increases, upsells, and expansions, as well as lost revenue from customers that churned or downgraded.

Gross Retention vs. Net Retention

Which is more crucial to monitor, gross retention or net retention? The answer is that both are necessary as they provide valuable information.

With gross revenue, you can see how stable your revenue is without considering growth from upgrades. This lets you see how much churn and downgrades impact your revenue. You can then take preventative measures, like reaching out to customers at risk of churn or implementing a customer success adoption plan, if they reduce your revenue.

On the other hand, net revenue lets you figure out how fast your revenue is growing. You can use this insight to evaluate the effectiveness of your cross-sell and upsell strategies. Developing a customer expansion strategy to encourage adoption and upgrades can be a great corrective action if your analysis shows underperformance in these areas.

It's a common practice for businesses affected by customer upgrades, downgrades, or cancellations to analyze their growth using gross revenue retention and net revenue retention. They're similar metrics but have some key differences, including:

Customer Success

A high GRR indicates the company is attracting new customers while not losing its existing ones. This indicates an excellent value proposition. Analysts can use GRR as a performance indicator to inform them how many customers cancel or downgrade the product. Alternatively, if your GRR is low, it may be helpful for a business to identify and evaluate the reasons for customer churn before it becomes an issue of critical importance.

Related: Cohort Analysis and Reducing Churn Rate with B2Metric

As with customer success, net retention measures revenue growth as a result of upgrades and add-ons. When your customers are happy with your product, they will pay more for it. The metric measures the amount of revenue you generate from existing customers.

Growth

When evaluating long-term growth prospects, gross revenue retention is one of the most useful metrics, as it tells you how much money or how many customers you are retaining. Getting new customers is vital when you're growing a business and attracting supporters.

Rather than seeking out new customers, companies typically focus on satisfying the needs of existing customers to demonstrate growth through net retention.

Related: How to Improve Customer Retention in Retail Industry?

Churn rate

Compared to profit margins, GRR gives a better picture of churn's financial impact, so it might be a right one to use. While some customers will leave or cancel, a good indicator is whether you're gaining more than you're losing.

Churn plays a part in NRR, too. If a customer cancels, it changes the business' revenue. Since NRR also includes upgrades, churn might be less noticeable. While churn is a factor, it's a secondary one. If you want to focus on other indicators than churn rate, you might find the NRR metric useful.

Related: Mastering Customer Churn: Understanding, Calculating and Reducing Rates

Optimize Retention Strategies to Increase Revenue

Net retention takes into account revenue-increasing growth activities, while gross retention shows revenue maintained without taking them into account. If you want to see how effective your retention strategy is, you'll need both metrics.

We don't just monitor revenue retention as an endpoint, we use it as a catalyst to tweak and improve both customer retention and revenue retention. With a specialized platform, B2Metric automates customer retention practices and processes, which boosts revenue retention. 

Schedule a live demo and see how B2Metric can boost your customer retention and revenue retention strategies.