What is Gross Revenue Retention?
The Gross Revenue Retention (%) represents the percentage of a SaaS company’s recurring revenue retained from existing customers, inclusive of the effects of downgrades and cancelations.
How to Calculate Gross Revenue Retention (Step-by-Step)
Gross revenue retention, or GRR, is a SaaS KPI that reflects how effective a company is at retaining existing customers once acquired, which coincides with a low churn rate.
- Step 1 → The calculation of the gross revenue retention starts with determining the monthly recurring revenue (MRR) of the company at the beginning of the month.
- Step 2 → From there, the beginning MRR metric is adjusted by the lost MRR from churn and downgrades.
- Step 3 → In the final step, the resulting value from the 2nd step is divided by the beginning MRR to determine the gross revenue retention.
In SaaS, the term “churn” describes customers that are no longer doing business with the company (i.e. cancelations and the refusal to renew a contract after expiration), whereas “downgrades” refer to customers that move to a lower tier plan at a lower price point.
The unique attribute of the gross revenue retention metric is that expansion revenue – i.e. the incremental revenue derived from existing customers via upselling and cross-selling strategies – is neglected in the calculation.
The higher the GRR percentage, the more favorable of a position the SaaS company is in because more customers are retained with less contraction revenue incurred.
Another side benefit is that the necessity for expansion revenue (i.e. upgrades) is reduced. Of course, methods to improve expansion revenue will still be pursued, but a high GRR percentage eases the pressure off the sales and marketing team.
While extracting more expansion revenue from customers is certainly no easy task, a company with strong customer retention and minimal churn establishes a solid foundation from which to work.
Gross Revenue Retention (GRR) vs. Net Revenue Retention (NRR)
The concept of revenue retention is a critical component in the SaaS business model, which is oriented around establishing long-term, recurring revenue.
There are two methods to measure revenue retention: 1) Gross Revenue Retention and 2) Net Revenue Retention.
- Gross Revenue Retention (GRR) → Gross revenue retention, or “gross dollar retention”, focuses on a company’s ability to retain existing customers. Hence, expansion revenue is not part of the metric, which is the distinction between gross revenue retention and net revenue retention.
- Net Revenue Retention (NRR) → In contrast, the net revenue retention, or “net dollar retention”, measures a company’s ability to retain customers, as well as generate more revenue from existing customers. Since expansion revenue is included in the calculation, the percentage can exceed 100%, unlike the gross revenue retention, which must remain below 100%.
In practice, the net revenue retention (NRR) tends to carry more weight to investors and operators since expansion revenue is a core component of the SaaS revenue model.
However, from a risk standpoint – i.e. periods of low customer acquisition rates and a challenging environment to generate expansion revenue – GRR is a key performance indicator (KPI) in terms of understanding if a SaaS company has the customer base to withstand an economic contraction or long-term recession.
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Gross Revenue Retention Formula
The formula to calculate the gross revenue retention is as follows.
Gross Revenue Retention (GRR) = (Beginning MRR – Churned MRR – Downgrade MRR) ÷ Beginning MRR
Gross Revenue Retention Calculator – Excel Template
We’ll now move on to a modeling exercise, which you can access by filling out the form below.
Gross Dollar Retention Calculation Example
Suppose a SaaS company generated $1 million in monthly recurring revenue (MRR) at the start of the month.
In the current period, Month 1, a total of 4 customers churned while 5 customers downgraded to a lower tier plan.
- Number of Churned Customers = 4
- Number of Customer Downgrades = 5
The average revenue per user (ARPU) on a monthly basis is $5,000, so the churned MRR is $20,000.
- Average Revenue Per User (ARPU) = $5,000
- Churned MRR = 4 × $5,000 = $20,000
Further, we’ll assume that the contraction MRR from each downgrade is $1,000, meaning that the downgrade MRR amounts to $5,000.
- Downgrade MRR = $1,000 × 5 = $5,000
Upon inputting our assumptions into our formula from earlier, we arrive at a gross revenue retention figure of 97.5%.
- Gross Revenue Retention (%) = ($1 million – $20k – $5k) ÷ $1 million = 97.5%