Sophisticated SaaS businesses calculate their Gross Customer Retention (GCR), Gross Revenue Retention (GRR), and Net Revenue Retention (NRR) to glean insights into their customers' satisfaction and spending habits. What are the differences between these three metrics? How do businesses know which one to highlight?
We've compiled all the information you need to understand these three metrics and how you can use each to your advantage!
💡TL;DR: Which retention metric you focus on is highly dependent on your business's individual needs. GCR can be useful for companies with a homogeneous customer base, and few upsells. For companies with more upsells or more diversity among their consumers, focusing on GRR or NRR may be the best choice. Companies that are slow-growing and stable may find GRR most helpful, while fast-growing companies often direct their resources toward increasing NRR!
☝️ Metric 1: Gross Customer Retention
What is it?: Gross Customer Retention (GCR) is the number of customers who remained with your business from the beginning of a period to the end.
Why does it matter?: Every business owner knows it: obtaining new customers is hard! When they leave, there is no guarantee that you will replace them. It's tough to recover from erosion of your customer base, so if you're losing customers, you need to know about it. The number of customers who continue using your product can also provide valuable information about the product's reception. Great services with an excellent market fit keep customers! If your GCR is lower than ideal, it may be time for some tweaking.
When should I focus on GCR?: Typically, companies emphasize revenue retention over customer retention. However, GCR can be the most valuable metric for businesses that meet these criteria:
- Your business doesn't have many upsells. If you mainly provide a single base product at a standard price, the number of customers you retain will give you a good idea of your revenue. On the other hand, if you upsell frequently, there are more variables for you to measure. Customer retention metrics alone might not paint a complete picture of your company's finances.
- Your customer base is highly homogenous. If your customers tend to be similar to one another, you're unlikely to see certain groups spending significantly more than others. That means that customer retention alone might give you a reasonable idea of your company's growth. With a diverse customer base, it’s common for some segments to spend much more than others. In that case, GCR won't always give you all the information you need.
There is one exception to the above rule: if your customer base is diverse, but is made up of clear segments, determining GCR for each segment independently can be advantageous (psst- Subscript) can help you accomplish that!). Knowing who's staying and who's leaving can be essential for increasing customer retention.
✌️ Metric 2: Gross Revenue Retention
What is it?: Gross Revenue Retention (GRR) is the amount of recurring revenue that stayed with your company from the beginning of a period to the end - not including revenue increases from upsells.
Why does it matter?: This metric can help you determine whether you're keeping your highest-paying customers. Your GCR may be high, but your profits can still be negatively affected if you're not catering to your most important clientele. On the flip side, low GCR doesn't automatically spell trouble if your GRR remains high. When the customers leaving are lower-paying, your revenue may be relatively unaffected.
Tip: Remember that assessing your customer base in segments is helpful. Segmentation can give you an idea of who your customers are. Looking at the varying characteristics among your consumers, who comprises the largest share? You might find that you need to spend your resources catering to this segment of your customer base. A segmented analysis can also help you determine which customers will bring your business the most long-term success. Is there a specific type of person that sticks with your service, continually brings in revenue, and increases their spending over time? If so, orienting your resources toward that type of customer is a good idea.
When should I focus on GRR?: GRR is a better descriptor of a business's stability than its growth. You should focus on GRR when:
- You're not exploding in growth from existing customers, but your company is retaining its revenue. If you have stable revenue but slower growth rates from existing customers, GRR may be your most helpful metric. You may find that maintaining an optimal GRR is a better use of resources than chasing growth from those same customers.
- You're looking to catch investors' attention. A high GRR is sometimes considered a good predictor of a business's long-term success, so if you're seeking funding, investors might prefer to see a higher GRR.
Keep in mind that a low GRR indicates unsatisfied consumers. People who are happy with a product will continue to use it, bringing in revenue. Just like with GCR, a GRR that's lower than you'd like is a sign that it's time to make some adjustments to your service.
🖖 Metric 3: Net Revenue Retention (AKA "Net Dollar Retention")
What is it?: Net Revenue Retention (NRR) is the amount of recurring revenue you obtained from existing customers in a period, including revenue increases from upsells.
Why does it matter?: Subscription services are a dream for businesses because of one simple fact: you only need to get customers once! That fact saves SaaS companies tons of resources that would otherwise go to things like buying advertising space and paying salespeople.
It's an even better deal if your existing customers spend more and more over time. Your company's NRR can tell you whether or not your customer's spending grew in the last year.
When should I focus on NRR?: NRR is the only one of these three metrics that communicates growth. NRR may be the best metric to focus on when:
- Your Business is Fast-Growing. Optimizing NRR can be helpful if your business is fast-growing, especially if your GRR is slightly below optimal levels. If you only have a modest GRR, but you have outstanding NRR, then you might want to play up your strengths. Consider directing your resources toward increasing NRR.
- You're looking to raise more financing (or go public!). Growth is vitally important to shareholders. If you want to expand your business to the public sector, a high NRR is critical.
Tip: Remember when we said to look at your customers in segments? If you want to improve your NRR, determine which segment shows the most growth in spending. That information can help you develop strategies for reeling in similar customers.
💡 An Important Note: You should assess NRR in cohorts over long periods. While it's necessary to know if a newer cohort is growing their spending with you, it's equally important to know if their spending is still increasing several years on. You may have a high NRR, but a cohort analysis reveals that your customers' spending drops over time. In that case, you should concentrate on increasing long-term customer satisfaction. Conversely, your NRR may appear misleadingly low if your customers only tend to increase their spending after some time has passed. A cohort analysis may demonstrate consumers spend more on your service after using it for a few years. Understanding how your customers behave over time can be essential in strategizing for their happiness.
⛳ Conclusion: Find the right metric for your own business
There is no one-size-fits-all approach to retention metrics. Each communicates a distinct dimension of business success, and each can be useful in a different scenario. While you should consider all three of these metrics, which one you should rely on the most depends on your business model, customer demographics, and company needs. If you're unsure which metric to use and when, just refer back to this this guide to help!
Want help noodling through which retention metric is right for you?
Join us for our Retention Metrics Roundtable Discussion on Thursday, January 13th! Reserve your spot here!