A study benchmarked that the median Net Retention Rate (NRR) is 102%, while the median Gross Retention Rate (GRR) stands at 91%.
These figures can fluctuate depending on the industry, market conditions, the product offered, and several other factors. Nevertheless, consistently high retention rates—both net and gross—often signify that a company is performing well in terms of customer satisfaction and product-market alignment. To achieve such retention, businesses should distinguish the difference between these two.
So, what qualifies as a “good” NRR and GRR?
What is Net Revenue Retention?
Net revenue retention (NRR) is a metric that indicates a company's capacity to maintain and enhance revenue from its existing customers over a specified timeframe. This figure offers valuable insights into a business's overall health and sustainability.
To compute the NRR, consider both the revenue lost due to customer churn and the revenue acquired through upsells, cross-sells, or expansions from existing clients.
The calculation can be broken down as follows:
The total annual recurring revenue = ARR
Revenue gained through subscription upgrades, including upsells and cross-sells by existing customers = Expansion ARR
Revenue lost from subscription downgrades = Contraction ARR
Revenue lost from subscription cancellations = Churn ARR
The formula can be outlined as follows:
What is Gross Revenue Retention?
Gross revenue retention (GRR) is a key metric that measures the percentage of recurring revenue preserved from existing customers over a set timeframe, excluding any revenue generated from upsells, cross-sells, or expansion efforts. It specifically addresses the potential revenue loss, commonly referred to as "churn," from customers who either downgrade or discontinue their subscriptions.
To compute the GRR:
Begin with the recurring revenue at the end of a period
Subtract any upsell or expansion revenue achieved during that time
Divide by the recurring revenue at the beginning of the period.
Multiply by 100 to get the percentage result.
The formula is as follows:
NRR vs. GRR
Both NRR and GRR are great metrics for businesses, particularly those relying on subscription-based models, as they provide valuable insights into the health and sustainability of revenue from existing customers.
Technical Differences
The NRR considers both the adverse effects of churned revenue and the positive effects from upsells, cross-sells, or expansion revenue over a specified period. GRR in contrast, solely evaluates the negative impacts of revenue lost from downgrades or customer churn, excluding any upsell or expansion revenue.
Similarities
Both metrics focus on a company’s current customer base rather than acquiring new customers. Also, they both utilize recurring revenue as the essential building block for their calculations, highlighting the sustainability of ongoing business operations.
Impact and Implications
Business Health and Stability:
A high NRR indicates strong customer retention along with effective upselling or expansion efforts. An NRR above 100% suggests growth from upsells and expansions surpasses any lost revenue, indicating a robust market position.
A high GRR reflects effective retention of existing revenue streams. A downward trend in GRR may signal potential issues in areas like customer satisfaction, service quality, or market competitiveness.
Growth Potential
NRR offers a broader perspective on growth capabilities. It implies that the business can enhance revenue without a heavy reliance on attracting new customers.
By omitting upsells and expansions, GRR shows a company’s effectiveness in preserving its current revenue base.
Strategic Implications
A low NRR might indicate a need for a business to reconsider its upselling and cross-selling techniques, whereas a high NRR points to successful strategies for customer account growth and service expansion.
A decreasing GRR could alert businesses to the need to re-evaluate their core products, customer service, or overall customer experience.
It’s How Your Customer Values You
When you look at these two metrics together, they give businesses a great view of customer health. GRR shows how strong the foundation is, while NRR reveals growth potential without needing to bring in new customers. Together, they really highlight how existing customers feel about the company’s offerings. If customers see the value, they stick around and often end up spending more.
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