GROSS RETENTION VS NET RETENTION: What are the Major Differences?

Gross retention vs net retention
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Choosing Net Revenue Retention (NRR) or Gross Revenue Retention (GRR) as your north-star growth number is not a binary choice. SaaS firms need to be aware of and take into account the effects of focusing just on these KPIs when assessing the efficiency of and implementing strategies for customer success. While it’s true that both play vital roles in every organization, they still differ. Well, let’s get to gross vs net retention and how SAAS tools can help you keep tabs on them.

Gross Retention vs Net Retention

By recognizing the differences between gross vs net retention, you can acquire a deeper understanding of your performance indicators. Learn what these KPIs are indicating. We’ll go over their computation, definition, and use.

What Is Gross Retention?

Our initial priority will be gross retention. The term “gross revenue retention” (GRR), which is another name for this statistic, underlines the difference between revenue retention and, at least directly, customer retention in this context. Of course, keeping more customers means keeping more revenue, so these two things are somewhat connected. However, in this case, our focus is on revenue retention. We’ll see in a moment how this technique for separating revenue retention might educate you on the role that client retention plays in your revenue outcomes.

Your gross revenue retention is the portion of your monthly recurring revenue (MRR) that you keep each month after subtracting the effects of churn or downgrades to less expensive products, but not the advantages of upgrades. Gross revenue retention may be estimated on a monthly, quarterly, or annual basis, depending on your selling strategy and average membership length. This can be quantitatively expressed as the monthly formula below:

The formula for determining GRR is [(MRR from renewals – MRR lost due to churn – MRR lost due to downgrades) / MRR at the beginning of the month]. * 100

What Is Net Retention?

Now let’s talk about net retention, also known as net revenue retention (NRR). With the exception of the fact that we now consider the extent to which upsells and cross-sells make up for revenue lost through churn and downgrades, this is very similar to gross retention. Remember that this time we’re talking about revenue retention rather than customer retention. However, it is still possible to talk about both net customer retention and net revenue retention because they are interdependent. It’s critical to keep in mind that these two elements are essentially the same whether you’re selling only one commodity or service. But just now, revenue retention is the focus of our work.

The formula for calculating net revenue retention is almost identical to that for calculating gross revenue retention, with the exception of the requirement to take into account the advantages of upsells and cross-sells. To keep our process straightforward, we’ll simply call these “upgrades.” When this new variable is added, our formula for GRR becomes our formula for NRR:

[(MRR from upgrades + MRR from renewals – MRR lost due to churn – MRR lost due to downgrades) / MRR at the beginning of the month] is the formula for calculating NRR. * 100

Net Retention vs Gross Retention: Which Should You Monitor?

So, which should be monitored more frequently, net retention vs gross retention? The correct response is that you need them both since they each offer important information.

Gross revenue demonstrates the consistency of your revenue without assuming an increase from improvements. This gives you the ability to calculate the revenue losses brought on by churn and downgrades. Once you’ve determined that they will result in a sizeable revenue loss, you may take preventative measures like getting in touch with clients who may be considering leaving or implementing a customer success adoption strategy to discourage downgrades.

The ability to focus on the rate of increase of your revenue from upgrades is provided by net revenue, on the other hand. You may learn from this how successful your cross-sell and upsell campaigns were. If your review reveals that you are lacking in these areas, you may take steps to improve them by developing a customer expansion strategy.

Gross vs Net Retention: Key Difference

Gross retention, helps you evaluate your revenue stability independently of future growth prospects. Losses can also be monitored in relation to downgrades and turnover. Thereafter, you can enhance the program itself to prevent user defection or downgrades.

On the other hand, the rate of growth in upgrade revenue may be monitored with Net Retention, allowing you to adjust your upsell and cross-sell tactics accordingly. Better onboarding can boost adoption and upgrades, allowing you to catch up if you’re falling behind in any of these areas.

How Do You Calculate Gross Retention From Net Retention?

You may get the GRR rate by subtracting the churn and downgrade MRR from the starting MRR, dividing the result by the initial sum, and multiplying the ratio by 100.

What Are Good Gross and Net Retention Rates?

Because it takes into account churn but does not profit from expansion, the maximum GRR is 100%. NRR can (and most likely should) be larger than 100% for the majority of enterprises because it takes expansion into consideration.

Gross Retention vs. Net Retention SAAS

SAAS tools are key elements in keeping tabs on your gross vs net retention strategy. Monitoring changes in your company’s income and clientele can be done using both gross retention and net retention. Understanding each metric’s ideal use in full is essential for making the right decision between the two. This is a synopsis:

Because it ignores revenue expansion, upsells, and upgrades, the gross retention rate is the appropriate indicator for strategic planning when examining the overall stability of your current revenue streams.

Upsells and cross-sells are taken into account when calculating your net retention rate. Because of this, you can examine the specifics of your continuous efforts to expand your clientele and enhance the effectiveness of your upselling and cross-selling strategy by using net retention as a statistic.

The best SaaS monitoring and growth tools for NRR and GRR

Below is a list of the top three methods for increasing NRR and GRR rates.

#1. Userpilot

To help users find new features and make the most of your product, Userpilot is ideal. Userpilot is a tool for product growth and adoption that creates interactive walkthroughs, tooltips, checklists, and models.

Micro surveys can also be created to collect user feedback and produce invaluable data. You may also create a clear in-app resource center using it for prompt customer support.

#2. Hotjar

You may track and understand trends in in-app user activity with the help of the behavior analytics platform Hotjar. All of the elements on your website are mapped using its famed heat maps. Additionally, you categorize each element using tags, classes, and other criteria.

#3. Mixpanel

Mixpanel, a product analytics tool, provides real-time data on how customers are interacting with your product. Over time, the KPI trends can be tracked and seen.

You can go further into the data and use its automatic analysis to identify the causes of the trends.

Can Net Retention Be Lower Than Gross?

In the argument between gross vs net retention, gross retention rates are always equal to or less than net retention rates and can never be higher than 100%.

What Is a Good Gross Retention?

There is a maximum Gross Revenue Retention Rate of 100%.

What Is NRR GRR?

Net revenue retention (NRR) and gross revenue retention are two essential metrics (GRR). NRR demonstrates both your capacity to retain customers and grow their monthly spending. Whereas GRR only demonstrates your ability to keep clients.

Does Gross Retention Include Downsell?

In terms of gross revenue retention, just the initial revenue is taken into consideration, less any money lost to down selling or churn.

Gross Retention vs Net Retention FAQs

How do you calculate gross retention from net retention?

You may get the GRR rate by subtracting the churn and downgrade MRR from the starting MRR, dividing the result by the initial sum, and multiplying the ratio by 100.

Which is better gross and net retention

Both are vital in strategizing the rention of employees in relation to revenue.

  1. EMPLOYEE RETENTION RATE: How to Calculate It and Things You Must Know
  2. 15 Best Customer Retention Strategies That Increases Profits (guide)
  3. RETENTION RATIO: How to Calculate it with Examples

References 

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