2024 CODiE Finalist
Softrax

Gross Retention

What is Gross Retention?

Gross retention is often used in the context of subscription-based businesses, particularly for SaaS and refers to the percentage of existing customers or subscribers who renew or continue their subscriptions during a specific period. Gross retention does not consider any new customer additions or expansion revenue.

Gross retention is especially important for subscription-based businesses because it provides insights into the ability of a company to retain its existing customer base. A high gross retention rate suggests that the company is effectively keeping its customers engaged, satisfied, and willing to continue their subscriptions, which is crucial for maintaining a stable and predictable revenue stream.

It’s worth noting that gross retention does not account for upsells, cross-sells, or revenue expansion from existing customers. It focuses solely on whether existing customers renew their subscriptions at the end of a given period. To get a more comprehensive view of revenue growth and customer relationships, businesses often consider net retention or net dollar retention, which includes both gross retention and the additional revenue generated from existing customers through upsells, cross-sells, and expansion.

What is the Formula for Gross Retention?

The formula for calculating gross retention is:

Gross Retention = (Number of Existing Customers at the End of a Period / Number of Existing Customers at the Start of the Period) × 100%

Here’s a breakdown of the key components of this formula:

  • Number of Existing Customers at the End of a Period: This represents the count of customers or subscribers who remained with the company and renewed their subscriptions during a particular period (e.g., a month, quarter, or year). These are the customers who were already using the service before the renewal period.

  • Number of Existing Customers at the Start of the Period: This represents the count of customers or subscribers who were using the service at the beginning of the same period. It serves as the baseline for measuring retention.

The result is expressed as a percentage to indicate the retention rate.

Gross Retention Calculation: Example

A SaaS company wants to analyze its customer base for a quarter (three-month period). At the beginning of the quarter, the company had 500 customers, and at the end of the same quarter, 450 remained. Looking at the formula, the business can see its gross retention rate:

Gross Retention = 450 / 500 × 100%

Gross Retention = 0.9 × 100% = 90%

Gross Retention = 90%

The gross retention rate for this SaaS company over the three month period was 90%. This means that 90% of the existing customers at the beginning of the quarter chose to renew their subscriptions at the end of the quarter, without considering any new customer additions or upsells to existing customers.

How are Gross Retention and Net Retention Different?

Gross retention and net retention are two related but distinct metrics used to assess customer retention and revenue growth.

Gross Retention focuses solely on existing customers and measures the percentage of those customers who renew or continue their subscriptions over a specific period, typically without accounting for expansion revenue or upsells.

  • Calculation: Gross Retention = (Number of Existing Customers at the End of a Period / Number of Existing Customers at the Start of the Period) x 100%
  • Purpose: Gross retention provides insights into the ability of a company to retain its customer base. It measures customer loyalty and the success of customer retention efforts.

Net Retention (Net Dollar Retention) considers not only the renewal or retention of existing customers but also includes the impact of upsells, cross-sells, and expansion revenue generated from those existing customers.

  • Calculation: Net Retention = (Revenue from Existing Customers at the End of a Period – Revenue Churn) / Revenue from Existing Customers at the Start of the Period x 100%
  • Purpose: Net retention provides a more comprehensive view of revenue growth and customer relationships. It accounts for both customer retention and the expansion of revenue from existing customers.

Key Differences Between Gross Retention and Net Retention

Gross retention only considers customer retention, while net retention considers both customer retention and revenue expansion.

Gross retention considers the number of customers retained, while net retention considers the revenue retained from existing customers and the revenue lost due to churn.

Net retention is often a more growth-oriented metric as it incorporates the additional revenue generated from existing customers, making it a valuable metric for assessing the growth potential of a subscription-based business.

Example: A SaaS company starts with 100 customers, loses 10 customers (churns) but upsells and expands the subscriptions of the remaining 90 customers, resulting in a net increase in revenue. Gross retention would be 90%, indicating that 90 out of 100 customers were retained. Net retention, however, could be greater than 100%, accounting for the additional revenue generated from the 90 retained customers.

Gross Retention VS Net Retention

What is a Good Gross Retention Rate (GRR)?

A good GRR can vary depending on the industry, the type of subscription-based business, and the specific circumstances of the company. Generally, a higher gross retention rate is preferable because it indicates that a larger percentage of existing customers are renewing their subscriptions, which can contribute to stable and predictable revenue.

Here are some considerations when assessing a good retention rate:

Industry Norms: A company should compare its retention rates to competitors and the industry as a whole.

Customer Acquisition Costs (CAC): How is a business’ CAC or churn rate. Lower values for both could indicate a good return rate.

Revenue Impact: Calculate the impact of gross retention on overall revenue. Even a small improvement in the gross retention rate can have a significant impact on long-term revenue growth and customer lifetime value.

Product and Market Maturity: Early-stage companies may experience lower gross retention rates as they refine their offerings and target customer fit. As a company matures and refines its product-market fit, it may see improvements in retention rates.

Customer Satisfaction: Customer satisfaction and the quality of the product or service can heavily influence retention rates. High levels of customer satisfaction tend to correlate with better retention rates.

Historical Trends: Track historical trends in a company’s gross retention rate. Consistently improving or maintaining a high rate may indicate a healthy customer base.

How is Gross Retention Rate Different from Renewal Rate?

Gross retention rate and a renewal rate are related metrics used in subscription-based businesses to measure customer retention, but they focus on slightly different aspects of customer relationships.

Gross retention rate measures the percentage of existing customers who renew or continue their subscriptions during a specific period, typically without considering any new customer additions or expansion revenue.

  • To calculate gross retention rate, use the following formula:
    • Gross Retention Rate = (Number of Existing Customers at the End of a Period / Number of Existing Customers at the Start of the Period) x 100%
  • Gross retention rate focuses solely on existing customers and their decision to renew or continue their subscriptions. It does not account for new customer additions or any upsell or cross-sell revenue from existing customers.
  • Gross retention rate provides insights into the ability of a company to retain its customer base. It measures customer loyalty and the success of customer retention efforts.

Renewal Rate measures the percentage of customers or subscribers who renew their subscriptions at the end of their current subscription term, typically after it expires. 

  • To calculate the renewal rate, use the following formula:
    • Renewal Rate = (Number of Renewed Subscriptions / Number of Subscriptions Up for Renewal) x 100%
  • Renewal rate is concerned with the act of customers extending their subscriptions when they come up for renewal. It does not consider other aspects of customer retention or expansion revenue.
  • The renewal rate provides insights into the success of subscription renewal efforts. It helps companies understand how many customers choose to continue their subscriptions and can help identify areas for improvement in the renewal process.

Key Differences between GRR and Renewal Rate

GRR looks at the overall retention of existing customers, while renewal rate focuses specifically on the renewal decisions of customers whose subscriptions have come up for renewal.

GRR can be measured over various timeframes (e.g., monthly, quarterly, annually), whereas renewal rate typically considers subscriptions that are due for renewal at a specific point in time.

GRR does not consider expansion revenue or upsells from existing customers, while renewal rate focuses solely on the act of renewing subscriptions.

Can't find the right definition?

We can help.

FREE CPE WEBINAR
00
Days
:
00
Hours
:
00
Minutes
WATCH THE WEBINAR NOW