What it means:

In the world of Software as a Service (SaaS), Net Revenue Retention (NRR) and Gross Revenue Retention (GRR) are crucial metrics that measure the ability of a SaaS company to retain and grow its existing customer base.

• Net Revenue Retention (NRR): NRR tracks the net change in revenue from existing customers over a specific period, accounting for expansions, contractions, and churn. It measures the growth or decline in revenue from your existing customer base, excluding any new customers acquired during that time.

• Gross Revenue Retention (GRR): GRR, on the other hand, measures the percentage of revenue retained from existing customers without factoring in any expansions. It focuses solely on preventing revenue loss due to customer churn.

Why it matters:

NRR and GRR are critical for SaaS companies for several reasons:

• Customer Health: These metrics provide insights into the health of your customer relationships. A high NRR and GRR suggest strong customer satisfaction and retention. A high NRR with a low GRR means that certain customers are very happy while others are leaving. Each situation is unique, but these metrics tell you where to start looking

• Growth Potential: NRR reflects the revenue growth potential within your existing customer base. A positive NRR means your existing customers are spending more with you, which is often more cost-effective than acquiring new customers. Typically, a Net Revenue Retention metric over 100% is the target. 

• Churn Management: GRR helps you identify areas where you might be losing revenue due to customer churn, allowing you to implement strategies to reduce churn rates. The first step to reducing churn is identifying it.

• Investor Confidence: Investors often look at these metrics to evaluate the scalability and long-term potential of a SaaS company.

Places it is used:

NRR and GRR are predominantly used in the SaaS industry. They are critical for SaaS companies to assess their financial health, plan for growth, and make informed decisions about pricing, customer success strategies, and customer retention efforts.

For example, SaaS companies may use NRR to set revenue expansion goals within their existing customer base. They might analyze GRR to understand which customer segments are more likely to churn and take proactive measures to retain those customers. NRR is an often deployed metric to determine the benefit that Customer Success representatives are creating. Similarly, GRR shows the client satisfaction with your customer service and product.

Where it gets tricky:

Calculating NRR and GRR accurately can be challenging due to various factors. For NRR, it's essential to account for the upsells, cross-sells, and contraction revenue from existing customers accurately. These calculations can become complex when dealing with multiple subscription tiers and pricing structures. Additionally, these metrics require a clear and concise definition of what is considered an expansion versus a new customer.

GRR calculations should focus solely on churned revenue, excluding any additional revenue generated from existing customers. Sometimes, distinguishing between lost revenue due to churn and expansion revenue can be intricate.

Interpreting the ideal NRR and GRR values can vary based on the stage of your SaaS company. Early-stage startups might have lower NRR as they are focused on acquiring new customers, while more mature SaaS companies typically aim for higher NRR and GRR values to demonstrate customer loyalty and growth potential.

An example: