Whenever you look to find investors or strategize your marketing, especially for a SaaS company, you come across the term Revenue Retention. It gives a fair amount of idea about the company’s growth & its reputation among customers. So here we will look at this in a simple & comprehensive way to calculate it.
What is Revenue Retention?
To be in brief, Revenue Retention is the percentage of revenue a company generates from its repeating customers. It is further divided into 2 types
- Net Revenue Retention – A broader term calculating both revenue share by recurring clients including the upgrades done in their subscriptions.
- Gross Revenue Retention – This shows you only the revenue share of recurring clients.
Let’s look at how to calculate them one by one.
How to Calculate Net Revenue Retention(NRR)
Let’s slice up the formula,
MRR = Last month’s recurring revenue.
Expansion MRR = Amount coming from Upgrading subscriptions by recurring clients.
Churn MRR = Amount lost due to customer discontinuing subscriptions.
Reduction MRR = Amount lost due to downgrading by previous clients.
Note: You can take the above numbers on an Annual basis for yearly subscriptions.
For eg, Netflix calculated its monthly recurring revenue of $10000 with Upgrades of $1000, Churn of $500 & Downgrades of $500.
So, NRR = {10000 + 1000 -(500 + 500)}/10000 * 100 = 100%
What is a Good Net Revenue Retention Rate?
Now, coming for the results on what number would indicate.
More than 100% = company growing very well
90 – 100% = growth in the stagnant stage. It might be a good number for a company that recently started with limited outreach.
Less than 90% = company in a declining state and actions must be taken on it.
How to Calculate Gross Revenue Retention (GRR)
Let’s see the term,
MRR = Last month’s recurring revenue.
Churn MRR = Amount lost due to customer discontinuing subscriptions.
Reduction MRR = Amount lost due to downgrading by previous clients.
For eg, Netflix has monthly recurring revenue of $10000 with Churn of $500 & Downgrades of $500.
So, GRR = {10000 -(500 + 500)}/10000 * 100 = 90%
Here, Results won’t cross 100% like Net Revenue Retention.
A number higher than 70% would be better to develop Investors’ trust.
Though the formula looks mostly the same, here a slight difference in perspective Gross Revenue Retention is provided than Net Revenue Retention.
GRR provides a better view of long-term customer behavior while NRR shows customer activity in the recent time frame.
Why it is Important to Calculate?
- Helps to bring new Investors & generate trust in former ones.
- Making Marketing strategies and creating new leads.
- Helps to find weak links like whether work on the product, pricing, or communications.
- According to Bain & Company, a 5% increase in customer retention can mean a 30% increase in profitability for the company.
So, in this simple way you can calculate the Revenue Retention.
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