Gross Vs Net Retention: Get Your Retention Strategy Right

‘Gross Retention vs Net Retention’ – they may seem alike to many. However, net and gross retention are two types of metrics utilized in tracking customer retention.

Among the metrics that businesses use to assess their performance, retention is one of the most important. This is especially true for companies that operate on a subscription-based model.

This piece will provide definitions, calculations and examples of gross retention vs net retention.

What Does Revenue Retention Mean?

Gross retention vs net retention – the two metrics are revenue retention measurements. Therefore, to get a better understanding of what is meant by revenue retention, we need to look at it from a broader perspective.

Revenue retention is the capacity of an enterprise or organization to keep its clients within a given period while earning constant income from them.

Any business with a subscription-based service or any other similar model that generates recurring revenues should consider this as one of the key financial indicators.

More explicitly, revenue retention takes into account earnings made through existing customers and compares them against those earned through new ones to gauge the overall health of the company.

A high rate of revenue retention shows that there is faithfulness among clients which leads to their being kept by such businesses.

Businesses can measure their performance on various aspects like customer churn reduction or increase in customer lifetime value when they measure revenues retained; this will eventually result in improved gains and profitability for these enterprises.

What Does Gross Revenue Retention Mean?

GRR full form – GRR stands for ‘Gross Revenue Retention’.

GRR meaning – This is the percentage of revenue produced by clients who renew or increase their subscriptions during a particular period without considering the effect of any new customer purchases.

Simply put, it measures only the gross revenue retention of current customers and their desire to keep using a product or service.

Gross revenue retention refers to the amount of money earned from existing customers over total earnings; it gauges what proportion of a company’s income comes from its present clientele base and its loyalty towards goods or services offered.

How To Calculate Gross Revenue Retention Rate?

One reason why you should use gross revenue retention is because it’s an easy metric to calculate. Here’s the formula:

For instance, if a business starts the month with $100,000 in monthly revenue from existing customers and ends the month with $90,000 (when subscriptions have been renewed or canceled by this time), then $10,000 would be the revenue churn.

In this case, we can do the following calculation :

Gross Retention Rate = ((100-10,000)/100,000) x 100 = 90%

So this business has a gross retention rate of 90%.

What Is Net Revenue Retention?

So, what is NRR? NRR meaning – Net retention is similar to gross retention, but unlike it, net retention pays attention not only to existing subscribers but also takes into account downgrades and upgrades.

Net revenue retention is a metric that allows a better comprehension of whether or not the company can hold on to its clients while producing recurring income as well as satisfying them adequately enough to gain “expansion revenue”.

Moreover, this metric besides revealing customer preservation and money-making power can assist enterprises in identifying weak points in their product or service packages.

When corporations know what causes customers to churn or lower their subscriptions they can refine those aspects of their offerings which will lead to higher levels of satisfaction among clients.

Recommended Read: How To Calculate & Increase Net Revenue Retention

How To Calculate Net Revenue Retention Rate?

Net income retention estimation is determined by the percentage at which any changes in revenue from existing customers are affected by churns, downgrades or upgrades. The net revenue retention formula rate is:

The NRR formula is as follows:

For instance, if at the beginning of the month, a company has $100000 per month retainment revenues from its existing clients and they go down to $90000 at the end of the same month (that’s after subscribers have renewed their subscription or canceled); then $10000 would be considered as revenue churned.

Now let’s assume that this company also experienced $5000 worth of downgrades and gained another $5000 in upgrades. 

Therefore;

Net Retention Rate = ((100 + 5 – 10 – 5)/ R(t))× 100

This means that such a business would have a net retention rate of 90 percent.

In other words, it implies that even after accounting for any lost revenues due to churns, downgrades or upgrades; an enterprise still retains ninety per cent (90%) of its income from existing customers.

Gross Retention vs Net Retention

Gross retention vs net retention – two important metrics for measuring customer retention and revenue generation in a business.

Even though they both provide useful information about a company’s income streams, there are some differences when it comes to gross retention vs net retention.

While it excludes lost revenue caused by customer downgrades (or gained through upgrades or upsells), gross revenue retention is concerned with the amount of money received from renewing subscriptions by existing customers and churned income.

This index shows how much an organization can keep its current clients while ensuring that there is continuous revenue flow.

On the other hand, net revenue retention incorporates any changes in income from existing clients because of churns as well as downgrades, upgrades, upsells, and other types of “expansion” revenues.

It therefore gives a more accurate indication of whether or not companies can retain their clientele bases over time while still generating periodic revenues but also growing this same customer pool through additional services or products.

How To Optimize Retention?

One of the most important things to do when managing a business is optimizing customer retention. There are several methods you can use to increase both gross retention rate (GRR) and net retention rate (NRR) after taking a look at them.

Customer Segmentation

Initially, customer segmentation can be adopted alongside customer lifetime value (CLV) analysis which helps in identifying those clients who bring more profits than others. This way they will receive better care from your team plus offers tailored specifically for their needs hence enhancing loyalty/enhancing satisfaction so that such individuals continue staying with you longer.

Categorization

Besides this, it’s also good practice to group customers into different categories based on some common characteristics or behavior patterns to test various approaches per each group while measuring how effective these tactics may turn out over time.

Cross-Selling & Upselling

Another thing worth considering is cross-selling/upselling not only because it increases NRR but because it can foster loyalty among buyers or even reward those who have been with the company for quite some time.

If upselling is done properly where a client gets offered another product/service that satisfies his/her needs better than what s/he currently has in possession then chances are high he/she will take up such an offer thereby making both parties happy – seller gets more revenue while buyer enjoys improved experience/usefulness/value derived from using new item bought from same supplier; thus leading towards greater long-term achievements eventually.

Automation

Furthermore, automated marketing campaigns could be utilized that target those customers likely to churn if nothing is done about them soon enough.

How CrossVal Can Help

Accelerate your business decisions with CrossVal, the breakthrough data analysis platform that outperforms spreadsheets. Why linger in the maze of spreadsheets for 3 long weeks when CrossVal delivers results in just 4 minutes and 10 seconds? Embrace the future, embrace speed, and embrace CrossVal – your key to unlocking strategic insights faster than ever.

Frequently Asked Questions

Why is it important to track gross revenue retention and net revenue retention?

Gross retention vs net retention – tracking both of these metrics is vital for companies that depend on existing customers’ recurring revenue. These indicators help establish what drives a longer lifespan for buyers, and account expansion opportunities besides typical service offerings.

What’s more useful – GRR or NRR?

Gross retention vs net retention – while the two metrics help understand a company’s efforts towards generating income, net revenue retention gives a more accurate view of how well it can create expansion revenues beyond its usual range.

What is the ideal GRR and NRR?

To achieve ideal gross revenue retention rates, businesses should concentrate on excellent customer care services; fulfilling all promises made when selling goods or services; providing specific deals to those clients who might quit doing business with them, and lastly, giving incentives which will encourage individuals to renew their subscriptions again.

For a greater net income preservation ratio firms may consider upselling already acquired clients into higher-tiered programs as well as providing promotions that are designed specifically around keeping vulnerable customers from downgrading their subscriptions.