Read TL;DR
- GRR is a key metric that indicates a business's health in the long term. It measures the percentage of recurring revenue a SaaS company keeps from existing customers over a set period. Click here to learn the formula for GRR.
- GRR assesses the impact of churn on your revenue. A strong GRR shows predictable growth as customers renew their contracts.
- While GRR focuses only on retention, NRR includes both retention and expansion. GRR reveals the impact of churn, which can be hidden by strong expansion revenue in NRR.
- Based on ACV, companies must aim for GRR to range from 92% to 95%. GRR might be artificially high in the first three years. GRR and growth rates are linked when GRR is below 80%. A base GRR of 80% is needed to match competitors.
- Improving customer onboarding, investing 1-2% of revenue in customer success, and building customer-centric systems help maximize GRR.
- Strong GRR is critical for forecasting revenue and demonstrating customer stickiness. Investors assess GRR and NRR to get a complete view of growth and retention.
SaaS companies rely on various metrics to track their performance and growth. One of the most common is Gross Revenue Retention (GRR), which is also sometimes referred to as Gross Renewal Rate or Gross Dollar Retention (GDR).
What is Gross Revenue Retention? Gross Revenue Retention is the percentage of revenue a company retains from its customers over a defined period (usually one year). Unlike Net Revenue Retention (NRR), another popular SaaS metric, GRR doesn’t take expansion into account but does take into account downgrades and cancellations. GRR is also different from customer retention, which focuses on customer counts instead of their retained revenue.
In this guide, we share GRR’s formula and relevant industry benchmarks. We also compare GRR to NRR. Keep reading to learn more.
Table of Contents
What GRR means for your SaaS business?
There are several reasons why SaaS companies frequently track GRR. For starters, the metric is a clear indication of how churn is impacting your company’s revenue. A good GRR rate means that your company is retaining an acceptable amount of recurring revenue and isn’t losing much to subscription downgrades and cancellations.
Because GRR is focused on the impact of churn, investors analyze it to spot any churn issues in high growth companies – something that net revenue retention (NRR) can hide if the company has a great land and expand sales motion.
Investors also tend to focus on GRR because it’s a reliable measure of the long-term health of a company. They want to see that your customers are continuing to buy from you (i.e, renew their contracts). Customer stickiness translates into a predictable growth rate that can be used to forecast the future success of your business using SaaS metrics-based planning.
Learn more about SaaS metrics here
How do you calculate Gross Revenue Retention?
Because GRR is a measure of customer retention, it is calculated for a specific cohort of customers, which is comprised of all the customers you have at the start of whatever time period you’re evaluating. This is important because the number of customers you have at any given time is dynamic. Therefore, the only way you can measure customer retention is to select a cohort of customers and track the retention of that cohort over time.
Below is the formula to calculate gross revenue retention. Note that the ARR values in the equation should all be from the same cohort (the same set of customers).
It’s important to understand the terms in the gross retention formula:
- Annual Recurring Revenue (ARR) = The total amount of recurring revenue in a particular 12-month period.
- Churn ARR = Loss of revenue from subscription cancellations during the same 12-month period.
- Contraction ARR = Loss of revenue from subscription downgrades during the same 12-month period.
Let’s walk through an example:
What is a good Gross Revenue Retention rate?
Now that we understand why it’s important to calculate GRR and how to do that, let’s tackle the next question: What is a good GRR for SaaS?
First, note that the highest possible value for Gross Revenue Retention is 100%. SaaS Capital published a report in June 2022 that outlined the following median gross revenue retention rates based on ARR:
- Less than $1M – 90%
- $1-$3M – 92%
- $3-$5M – 91%
- $5-$10M – 90%
- $10-$20M - 91%
- Greater than $20M - 91%
The report also highlighted GRR grouped by average contract value (ACV):
- Less than $12,000 – 90%
- $12,000 - $25,000 – 92%
- $25,000 - $50,000 – 92%
- $50,000 - $100,000 – 92%
- $100,000 - $250,000 – 95%
- Greater than $250,000 – 95%
SaaS Capital’s research also highlighted that vertical SaaS companies experienced slightly higher GRR than horizontal ones, with the latter retaining 91% and the former 93%. Additionally, bootstrapped companies reported a GRR of 93% compared to 91% for VC-backed companies.
Gross revenue retention does not vary much based on the number of years a company has been operational. Here’s what SaaS Capital’s report found:
- Less than 3 years – 93%
- Three to five years – 92%
- Six to eight years – 90%
- Nine to 11 years – 90%
- 12-14 years – 92%
- 15-17 years –92%
- Over 17 years – 93%
Given these findings, SaaS Capital listed the following takeaways:
- Higher ACV products experience greater GRR. For those with ACVs less than $100,000, 92% is a good target. For those with greater ACVs, 95% should be the benchmark.
- GRR during the first three years of the company’s life might be artificially elevated because customers have not had enough time to churn.
- GRR and growth rates are correlated when GRR is less than 80%. It is a table stakes benchmark and companies must aim for at least 80% to equal competitor performance.
How to maximize GRR?
Maximizing GRR is a critical task at every SaaS company. By enhancing customer experience, businesses will see an increase in customer loyalty, and hence, retained revenue. Let’s discuss some ways to boost your GRR:
- Improve the onboarding experience for customers – If you don’t educate and set expectations right out of the gate, you’re setting your customers up for frustration and disappointment. Reach out to them quickly, identify what their priorities are, and address them. Remember, first impressions matter!
- Invest in customer success – While it can vary, a good rule of thumb is to invest 1-2% of your revenue into customer success. This will pay off once your customers learn that they can count on you to provide products/services of value along with exceptional service.
- Build and optimize your processes – As your SaaS company scales, its processes will help your employees deliver consistent experiences to your customers. They will enable your internal teams to repeatedly deliver high-quality products/services that your customers can depend on.
Gross Revenue Retention vs. Net Revenue Retention
The key difference between NRR and GRR is that NRR reflects both customer retention and expansion, while GRR only reflects retention. Another way to understand this is NRR is a broader measurement that indicates scalable growth. GRR, while narrower, highlights the impact churn is having on a company’s growth.
Investors look at GRR and NRR together because massive expansion can hide significant churn. By evaluating GRR, investors can look at churn before expansion and detect whether any worrying patterns exist there.
Sometimes folks ask: Why is GRR less than NRR? NRR must be higher or equal to GRR because GRR excludes expansion in all its variations (upsells, cross-sells, add-ons, price increases) and, as a result, can at most be 100%. NRR, on the other hand, includes expansion and can go over 100%.
Here is the formula for NRR:
How Drivetrain simplifies revenue retention analysis?
GRR and NRR are only two of many metrics that SaaS companies must keep tabs on to establish and maintain a clear understanding of their performance and growth. Drivetrain provides a strategic FP&A platform that dramatically simplifies customer retention analysis and SaaS revenue projection. Here are some of the benefits the company offers:
- Clear, accurate planning 10x faster
- A single source of truth for all your actuals
- Ability to easily and collaboratively build financial models
- Board-ready reports with engaging visuals
- Automated connections to all your source data
It’s imperative that your company track GRR, NRR, and other crucial SaaS metrics. Doing that, though, is tedious and stressful when you’re manually gather and enter data into spreadsheets from multiple sources, not to mention trying to keep it all updated. There’s an easier way.
FAQs
Gross Revenue Retention (GRR) is the percentage of revenue a company retains from a specific customer cohort over a defined 12-month period (usually a year). Unlike Net Revenue Retention (NRR), another popular SaaS metric, GRR doesn’t take expansion into account.
Because GRR is a measure of customer retention, it is calculated for a specific cohort of customers, which is comprised of all the customers you have at the start of whatever time period you’re evaluating. Here’s the formula to calculate GRR:
GRR = (ARR at the start of the period – Churn ARR – Contraction ARR) ÷ ARR at the start of the Period × 100%
While both metrics are immensely helpful, this isn’t an either/or situation. SaaS companies should monitor both GRR and NRR to get a full picture of retention and churn. Each provides a different context so you can run your business successfully.
Unlike NRR, GRR excludes expansion revenue (which caps it at 100%). On the other hand, NRR accounts for expansion and so can be over 100%.
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