Gross Revenue Retention (GRR) vs. Net Revenue Retention (NRR)
What is Gross Revenue Retention (GRR)
Gross Revenue Retention is a financial metric used to measure the total revenue retained from existing customers over a specific period, typically without factoring in upsells, cross-sells, or new customer acquisitions. It provides insights into a company's ability to maintain and preserve its existing revenue base.
The formula for Gross Revenue Retention is:
In this formula:
"Revenue at the End of the Period from Existing Customers" is the total revenue generated from existing customers at the end of the measurement period.
"Revenue at the Start of the Period from Existing Customers" is the total revenue generated from the same set of existing customers at the beginning of the measurement period.
The result is often expressed as a percentage.
Gross Revenue Retention does not factor in expansion to new customers, therefore the rate can never be greater than 100. Numbers can vary from one industry to another, however a GRR of 90-95 or better is usually considered to be a good benchmark to try and achieve. This indicates that a business has not driven away customers and does not appear to currently be in danger of losing market position.
Gross Revenue Retention is a crucial metric for subscription-based businesses, Software as a Service (SaaS) companies, and other businesses with recurring revenue models. It helps management assess the health of the customer base, identify areas for improvement, and make informed decisions to minimize churn and maximize customer lifetime value.
What is Net Revenue Retention
Net Revenue Retention is a financial metric used to measure the overall change in revenue from existing customers over a specific period, taking into account not only the revenue retained but also the additional revenue generated from upsells, cross-sells, and expansions within the existing customer base. It provides insights into a company's ability to not only retain customers but also to grow revenue from those customers. Due to the factoring in of upselling and expansion, unlike GRR, NRR can be greater than 100. This would show that the firm has not only been able to retain customers, but has been able to grow their customer base.
The formula for Net Revenue Retention is:
In this formula:
"Revenue at the End of the Period from Existing Customers (including expansions and upgrades)" is the total revenue generated from existing customers at the end of the measurement period, including any additional revenue from expansions, upsells, or cross-sells.
"Revenue at the Start of the Period from Existing Customers" is the total revenue generated from the same set of existing customers at the beginning of the measurement period.
The result is often expressed as a percentage.
Significance of Gross Revenue Retention (GRR)
While it may always seem better to be expanding and growing new customers, firms must remain focused on retaining existing customers before anything else. It is cheaper to retain a customer than to acquire a new one. Customer acquisition costs vary by industry, and while acquiring new customers can often signify firm health and an improving market position, it is always going to be more expensive to do this.
A Gross Revenue Retention rate below 100% suggests a decrease in revenue from existing customers. This could be due to customer churn, which may result from various factors such as dissatisfaction, competitive reasons, or changes in customer needs. It is important for a business to track each of these to keep up with the tides in their industry.
High Gross Revenue Retention rates indicate business stability. It means that the company has been successful in maintaining relationships with customers. It helps businesses anticipate and budget for revenue from existing customers, including potential expansions or reductions. This can be difficult to project when considering new customers.
Additionally, investors often look at Gross Revenue Retention as a key performance indicator. A high rate can signal the company's ability to maintain and grow revenue organically, which is appealing to investors seeking stable and sustainable business models. A high GRR shows the firm is not stretching resources thin in an attempt to artificially grow to inflate revenue numbers.
Maintaining and increasing revenue from existing customers is closely tied to effective customer success strategies. Businesses with high Gross Revenue Retention rates typically BB
prioritize customer satisfaction, support, and ongoing engagement. This can lead to long term firm success and indicates a healthy position for the firm.
In summary, Gross Revenue Retention is a crucial metric for businesses focused on maintaining their customer base. It provides a snapshot of customer satisfaction, revenue stability, and the overall effectiveness of a company's customer retention strategies. Businesses can use this metric to make data-driven decisions that contribute to long-term financial success.
Significance of Net Revenue Retention (NRR)
Similarly, NRR offers firms a metric that can quickly elucidate the health of their relationship with customers. However, it goes a step further by introducing expansions and upgrades into the equation. In this way, NRR attempts to reveal more about the relationship between the firm and its customers. A higher NRR can display the customers’ trust in the products and services being offered to them currently, which persuades them to expand the business they do with the company.
Because of this additional information available with Net Revenue Retention, it is important to find both when hoping to accurately and completely evaluate the relationship with customers.
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