You might (or might not) know that there are multiple ways to calculate Gross Revenue Retention (GRR) and Net Revenue Retention (NRR).
What are these different methods? When should you use each type of calculation, and how do you complete them?
If you need a quick review, check out this report for an overview on SaaS retention metrics. Then, keep reading to learn about the two major methods for calculating retention, and all the details you need to know to use each to your advantage.
☝️Method 1: Calculating GRR and NRR for Boards and Investors 📈
When calculating figures to present to boards and investors, keep in mind that these groups are accustomed to using overall retention rates to evaluate and compare a business’s growth. Therefore, the best approach to calculating retention for these scenarios is a general one that includes all contracts.
Another upside to this approach is that the results usually reflect your business in the most favorable light possible allowing you to put your best foot forward for higher-stakes scenarios.
When preparing reports for this purpose, you can use the following formulas:
GRR accounts for lost revenue (downsells and churn) and renewed revenue, but not new revenue (upsells). Since you’re not adding in new revenue, your company’s GRR can reach a maximum rate of 100%. 💯
To make this example more concrete, we’ll plug in some numbers.
Let’s say we’re calculating a monthly GRR for January. In December, our company had $25M in revenue. In January, we lost $300K to churn and $150K to downsells.
Here is a completed GRR calculation for this scenario:
This figure, 98.2%, simply represents the percentage of dollars that carried over from December to January.
NRR tracks both lost and new revenue. Since you are accounting for new revenue, your NRR can exceed 100% - and we hope it does, because an NRR above 100% indicates growth - it means for every customer you sign on, on average you’ll earn even more from them in the future than you do now! 💰
This calculation is the same as above, except that we’ll include upsells in the numerator. Recall that in our example, we had $25M in total revenue for December, and lost $300K to churn $150K to downsells in January. Now, let’s say that we also had $500K in upsell revenue from January.
This is the new calculation:
🤘Method 2: Calculating Retention to Evaluate Customer Success Team Performance
Customer Success and Account Management teams have the most influence over contracts that are up for renewal (as opposed to all live contracts). So, the best way to evaluate the performances of your team members is to calculate GRR and NRR using only those renewals.
Imagine your company uses annual contracts, and you want to calculate Gross revenue retention for January.
In order to calculate GRR and NRR for this second purpose, you’d focus only on contracts that expire in January, since those are the ones up for renewal.
Begin with the customers who renewed their contracts, and determine how much total revenue was generated by these renewals. Let’s say that this number was $2.05M.
When you’ve determined that number, calculate the total amount of revenue that was up for renewal. Based on our prior numbers that showed $450K in lost revenue, we’re going to set this number at $2.5M.
Our GRR calculation for this example looks like this:
Just as before, the calculation for NRR is the same as for GRR, except that we’re going to include upsells in the numerator.
Let’s return to our previous example.
Our company had $2.5M up for renewal and $2.05M in revenue from those renewals, Recall that we had $500K in upsells. The calculation for NRR looks like this:
Notice that this is different from the figure we calculated previously. This figure indicates revenue shrinkage, but the one from the previous method indicates some growth. If your business calculates retention and obtains numbers like these, you should take it to mean that your company is growing overall, but that you’re lagging behind in terms of contract renewals.
To further emphasize the difference between these two methods, let’s take a look at the values as compared in this table:
Using both of these approaches for varying situations will give you the fullest picture of your business’s retention.
🤷 What About Out-Of-Cycle Upsells?
How do you calculate NRR when you upsell to customers who are not up for renewal? There are three options:
1. Exclude the upsell altogether.
This one isn’t our favorite. If you have an increase in revenue, you should keep track of it - that way, your team has incentive to push out-of-cycle upsells! Excluding the upsell also runs you the risk of calculating figures that don’t actually represent your company’s health.
So, include those upsells! The next two options explain how.
2. Include the upsell in the numerator, and also include the overall value of the contract in the denominator.
This option is viable, as it accounts for all upsells. That said, it does have a limitation: it’s not the best for incentivizing your team to generate renewals. This is because the addition of the contract value to the denominator reduces the impact of upsells on the final figure.
If you go with this method, this is the formula you should use:
3. Include the upsell in the numerator, but don’t add anything to the denominator.
This is the option we recommend the most. It includes all upsells in the calculation, creating an accurate picture of growth. Here’s what that formula looks like:
The other upside is that this method gives upsells a high amount of impact on your final NRR figure. Your team has more incentive to chase upsells when those upsells contribute heavily to your retention metrics.
If these formulas are starting to look a little daunting, don’t worry - software like Subscript can help you by automatically calculating the effect of out-of-cycle upsells.
🤔 Does The Method Actually Matter?
Yes! These two approaches often yield vastly different results. This will occur especially in months when renewals are on the low side.
Picture a company with an ARR of $100 million. This month, there are $5 million worth of contracts up for renewal. The company has a bad month, and only renews $3 million of these contracts. Their renewal-based GRR is calculated as follows:
That number doesn’t look so great. However, we can also use the other calculation method. Remembering that this company’s ARR was $100 million, we can determine their GRR this way:
Obviously, a 98% GRR reflects differently on a company than a 60% GRR does. Both numbers provide crucial information, so it’s helpful to rely on both for the appropriate scenarios.
💡 Other Variations On These Methods
There are more ways to customize your approach to retention calculations. Here are just a few:
👥 Calculating for a Specific Set of Customers
Some companies calculate retention using only a certain set of customers, like those with more than 10 employees, for instance.
Typically, the subset of customers chosen for retention calculations is the one the business perceives as its most important - those customers who make up the core of their base. The other customers may be kept for purposes of completeness, or as a means of staving off competition. However, they may not be critical to the company’s overall strategy, leading to their exclusion from retention calculations.
This approach allows for a more specific retention analysis. The downside is that it doesn’t provide an overall picture of retention, so this can be handy in conjunction with one of the methods described above. In these situations, the
⚖️ Calculating using Average Contract Value (ACV) instead of ARR
Since ACV includes fees from the contract that are non-recurring, this method is helpful when the classifications between recurring and non-recurring revenue are highly complex. Generally, when it comes to recurring revenue companies, we recommend keeping it simple and sticking with ARR.
🗓 Calculating Quarterly Versus Calculating Monthly
The best time frame for calculating retention largely depends on the amount of data that’s available to you. If your business is newer, you may not have enough data to calculate retention over longer periods of time.
The more data you have, and the older your company is, the longer your calculation periods should be. If you can reach back several years into your data, calculate on an annual basis. If not, calculating monthly or quarterly will suffice.
You can then annualize that number by using the following formulas. For annualizing quarterly retention:
For annualizing monthly retention:
🌈 Every company has slightly different retention definitions
This leads to many different formulas, but all adhere to the same basic structures.
For instance, Zoom uses the first method variation listed here: calculating NRR using only a specific set of customers. They limit their retention calculations to customers with greater than 10 employees.
“We calculate net dollar expansion rate as of a period end by starting with the ARR from customers with greater than 10 employees as of the 12 months prior to such period end (Prior Period ARR),” as indicated in the company’s Form S-1. “We then calculate the ARR from these customers as of the current period end (Current Period ARR). The calculation of Current Period ARR includes any upsells, contraction and attrition. We then divide the total Current Period ARR by the total Prior Period ARR to arrive at the net dollar expansion rate.”
Here, Net Dollar Expansion Rate can be viewed as another name for NRR.
Shopify uses a cohorted method for calculating retention. They complete these figurations on a monthly basis by determining what percentage of a particular cohort’s revenue remains with the company from month-to-month. They call this figure “Monthly Billings Retention Rate”, as described in their Form S-1.
“Monthly Billings Retention Rate, or MBRR, is calculated as of the end of each month by considering the cohort of merchants on the Shopify platform as of the beginning of the month and dividing total billings attributable to this cohort in the then-current month by total billings attributable to this cohort in the immediately preceding month.”
Evidently, these formulas can all be adjusted to increase their usefulness to your business 🙌 .
✌️ In Summary
When calculating retention for boards and investors, it’s best to calculate overall retention rates including all contracts. If you’re trying to assess the performance of your sales teams, it’s best to focus your calculations on contract renewals.
There are many ways you can tweak these formulas to customize them to your business’s needs. Consider the ways you will use your final figurations, and how you can tailor these formulas to best suit those situations.
Don’t forget - if you run into trouble, we’re here to help! Subscript provides detailed reports on retention, all without the hassle of completing these calculations on your own 😃 .