You’ve probably heard of GRR in SaaS financial jargon. This popular metric is quite simple to understand.
Read on to find out how it fits into your SaaS business.
GRR stands for gross revenue retention. This is a key metric for any business with recurring revenue. It is a measure of how much of your ongoing, monthly, or yearly income is being re-spent on your business. This can be a useful metric to predict future business growth.
Unlike net revenue retention (NRR), gross revenue retention does not include an expansion or one-time payments, making it a more accurate measure of true churn.
While revenue retention rates are important, it’s more important to focus on retaining customers. For instance, suppose a business retains its customers for one month, but some of them downgraded their plan and spent less.
This will cause your gross profit margin to decrease, but your customer retention metric will remain the same.
Understanding your business’ revenue retention rate is important. It can help you understand how much profit you’re making from your existing customer base. When you have a high rate of revenue retention, it’s a win-win situation – happy clients and attracting more investment.
There are two types of revenue retention: gross and net. Let’s discuss gross revenue retention.
We will learn about this KPI and how to use to to strategically grow our business.
How to Calculate Gross Revenue Retention
To calculate your gross retention revenue, you’ll need to know the following:
- Revenue at the start of the month
- Cost of churn during that month
- Losses from downgrades during that month
Here is the formula for calculating GRR:
GRR = [(Recurring revenue at the beginning – Amount lost due to churn – Amount lost due to downgrades) / recurring revenue at the beginning] x 100
The GRR can be used to assess various time periods (e.g. a day, a week, a month, a year).
Make sure you’re consistent with your time intervals. Let’s say, for instance, you have 200 customers who each pay $1500 a month.
The recurring revenue at the beginning is 200 x $1500 = $30,000. Let’s say 2 clients canceled and 3 downgraded by $500 each within the same month.
GRR = (200 x $1500) – (2 x $1500) – (3 x $500) / (200 x $1500) = 98.5%
Your company’s retention percentage for this period is 98.5%.
The above equation shows the total revenue retained in your business after removing the effect of both upgrades and downgrades.
The maximum value for GRR is 100% while NRR can reach values above 100% due to expansion.
If your business has a lower Gross Revenue Retention (GRR) rate, it may not be feasible in the long term. When there are high numbers of customers leaving or downgrading, it indicates that there are parts of the business that still need improvement.
GRR In A SaaS Company?
The GRR formula is most important to SaaS businesses. If you’re a fast-growing SaaS company, you want to gain more investor interest.
The one thing that potential investors look at is the long-term growth of your business.
As you start to monitor your own GRR, you may discover new ways to increase yours. It’s important to understand that your GRR is relative to the broader market and that there’s always room for improvement.
To help you understand which targets you should aim for, here are the revenue retention targets for good businesses:
- The Median GRR in SaaS is 90%
- Aim for 80% GRR if your customers are SMEs
- Aim for 90% GRR if your customers are large enterprises
- Aim for 95% GRR if you have extremely high Annual Contract Value (ACV) products
Having a good GRR means fewer customer churns and downgrades. While you’re busy working on creating amazing products, don’t forget to invest some of your resources into your customers.
So, there you have it! Whether you use it yourself or not is up to you, but at least now you can understand the formula.