If your startup is a SaaS (or any other business with customers paying on a recurring subscription basis), churn is a critical metric – particularly net revenue churn and gross revenue churn – that will need constant measurement. Without a clear picture of your churn rates, it’s impossible to know how your departing customers are affecting your monthly revenue and growth.
Churn is a phenomenon that can happen at any time in a customer’s journey with your business. If it’s not analyzed and dealt with, your business could be in serious trouble. Not only that, but if you’re looking to get funding or investors at any point, you need evidence of healthy churn numbers.
In this article, we’ll take a look at two of the key calculations you can use to measure churn by way of revenue retention in your startup. These methods will help you address any issues before they impact the bottom line of your company.
What is revenue retention?
Revenue retention is the revenue generated from the previous month’s (or year’s) customers. Keep in mind, however, that your revenue retention rate is not necessarily the same as your customer retention rate.
For example, if your SaaS retains all of its customers for a year, but they all downgrade to lower plans and spend less compared to the previous year, your revenue retention will be lower, but your customer retention metric will remain the same.
High revenue retention rates indicate to investors that you are driving repeat business from your existing customers, and that you are not losing too many users along the way. It also shows that for any customers you lose, you’re able to acquire more to take their place.
If you have a good product-market fit, competitive pricing, and excellent customer service, you should expect healthy numbers when it’s time to measure your churn and retention.
Net Revenue Retention Rate
Net Revenue Retention (NRR) looks at the net revenue left over from your existing customers in a set time period.
Net Revenue Retention takes into account the total revenue minus any revenue churn (caused by departing customers, or customers who have downgraded) plus any revenue expansion from upgrades, cross-sells or upsells. NRR can be calculated at any time, but is usually looked at on an annual or monthly basis.
NRR is perhaps the most fundamental KPI in terms of determining customer success with your product. If you’re a highly successful company with happy customers, your NRR will most likely exceed 100%. If you’re closer to 0%, it’s time to start taking a serious look at where your customers are churning out and take evasive action.
Your NRR percentage is a broad metric that functions as a snapshot of what your company might look like over time if no new customers were acquired.
Gross Revenue Retention Rate
Gross Revenue Retention (GRR) measures annual revenue lost from a company’s customer base, not including any benefits from expansion revenue (cross-sells, upsells), or price increases. Gross Revenue Retention is a representation of your success in retaining your existing customers.
The GRR percentage ranges between 0% and 100%. The more optimized your business processes are, and the closer your ratio gets to 100%, the better chance you have of maintaining a healthy company growth rate.
Points to note:
- GRR will always be less than 100%
- GRR must always be equal to, or less than, your NRR
- MRR for each individual customer in the current month must not exceed the MRR for that customer from one year ago
The lower your GRR figures are, the less likely investors are to take an interest in your business. This is because a percentage on the low side indicates that your business isn’t viable over the long term, and your high level of churn indicates that there are fundamental challenges within your business that need addressing.
Which is the best revenue retention rate to measure?
Between these two metrics, Net Revenue Retention and Gross Revenue Retention, you may wonder which is the best revenue retention rate to regularly measure.
NRR is a broad measurement that looks at the wider aspects of your revenue retention. As this metric contains more information, it naturally seems like the best option for businesses to work with. If your growth rate is high, this might indeed be the best solution.
However, GRR is advantageous in that it measures the longer term health of your business. Without the expansion sales factored in with NRR, you can see how your churn is affecting your ability to grow – as you can never make those extra cross-sells and upsells from churned clients.
For the most clarity around your churn, it’s useful to look at both of these revenue retention calculations to get a full and balanced picture of the churn in your business. It will also ensure that you have the numbers you need when it’s time to find investors or apply for funding.
For example, if your business has NRR of 120% and GRR of 90%, investors can see at a glance that you’re financially stable with steady growth. If your NRR is the same 120% with GRR of only 40%, investors will look on this less favorably, as these figures indicate that your growth is poor and less predictable within your existing customer base.
Churn isn’t just a calculation for measuring dollar values. It’s an important metric that can be analyzed to give you a clear picture of your customers’ journeys and successes with your product.
Using Net Revenue Retention and Gross Revenue Retention rates as churn indicators can help you pinpoint what’s not working in your business. This means you can plug any leaks in your core product and support experiences to improve your user journeys and increase your revenue retention.
This article was contributed by Lighter Capital, this article originally appeared on The Startup Finance Blog.