NRR vs. GRR: Why the differences matter for your SaaS company

In the SaaS world, understanding your revenue retention is business-critical. Two key metrics — NRR and GRR — offer valuable insights into the health and growth potential of your business. This article explores the key differences between NRR and GRR and why tracking both is essential for SaaS company success.  

Read on to learn:

• Clear definitions of NRR and GRR
• Why both metrics are vital for SaaS businesses
• Actionable methods to improve NRR and GRR
• Common mistakes to avoid when measuring revenue retention

Let’s start with a quick comparative chart to explain what these two metrics represent.

NRR vs. GRR: Key differences

Before diving into the intricacies of NRR and GRR, here's a quick comparison to highlight their core differences:

NRR vs. GRR takeaway: NRR shows the overall growth potential within your existing customer base, while GRR reveals the stability of your core revenue. 

Why both matter

One looks at the big picture, including expansion, and the other focuses on the foundation. Using them together gives a complete view of how well a business retains and grows its revenue.

What is NRR?

When asking, "What does NRR stand for?" the answer is net revenue retention. This metric is also sometimes referred to as net dollar retention (NDR).  

Net revenue retention, or NRR, is a critical metric for SaaS businesses. It measures the percentage of recurring revenue a company retains from its existing customers over a specific period. 

In essence, it shows how well a business is keeping and growing its revenue base without needing to acquire new customers. 

NRR meaning goes beyond just tracking customer renewals. It accounts for changes in revenue from existing customers, including upgrades, downgrades, and churn. Therefore, it provides a holistic view of revenue health within a customer base. 

A high net revenue retention indicates that customers are not only staying but also increasing their spending over time.  

The NRR formula

The formula for calculating NRR is:

NRR = (MRR at the start of the period + Expansion MRR - Churn MRR - Contraction MRR) / MRR at the start of the period

Where:

• MRR = Monthly recurring revenue  
• Expansion MRR = Revenue gained from existing customers through upgrades or cross-sells  
• Churn MRR = Revenue lost from customers who cancel their subscriptions  
• Contraction MRR = Revenue lost from customers who downgrade their subscriptions

Example calculation:

Let's say a SaaS company starts a month with $500,000 in MRR. During the month:

• They gain $50,000 in expansion revenue.
• They lose $25,000 due to churn.
• They lose $10,000 due to downgrades.

Then the NRR would be calculated as follows:

NRR = ($500,000 + $50,000 - $25,000 - $10,000) / $500,000 NRR = $515,000 / $500,000 NRR = 1.03 NRR = 103%

This means the company's net revenue retention for that month is 103%.

Why NRR matters

NRR is a powerful indicator of a SaaS company's health and growth potential. A high NRR suggests that existing customers are satisfied and find increasing value in the product or service. This reduces the reliance on acquiring new customers, which is much more expensive.  

So, to recap:

• A high NRR can greatly impact a company's valuation, as it indicates sustainable and scalable growth.  
• It provides valuable insights into the efficacy of customer success and account management strategies.
• When a company sustains a high NRR, the sales team can focus on strategic growth rather than constantly replacing lost revenue.

What is a good NRR benchmark?

So far, we know that a high NRR means happy users who are spending more on your solutions. Let’s get a bit more specific with a breakdown of typical NRR benchmarks and what they tell us:

• Above 100%: An NRR above 100% represents growth from existing customers. It means that even without acquiring new customers, the company's revenue is increasing. Each customer cohort is generating more revenue over time.
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• 120%-150%: This is considered top-tier performance. It reflects exceptional customer satisfaction and successful upselling and cross-selling efforts. Companies achieving this level of NRR are often seen as market leaders.  
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• Below 100%: An NRR below 100% signals revenue contraction. It indicates that the company is losing more revenue from existing customers than it's gaining. It can be a red flag for investors and requires a review of customer retention and expansion strategies.

Note: Read more about NRR in SaaS businesses here.

What is GRR?

When discussing revenue stability, one key metric is gross revenue retention or GRR. It’s a metric that focuses on the revenue a company keeps from its existing customer base, excluding any increases from upsells or cross-sells. 

GRR revolves around the core revenue retained, showing how effectively a company prevents losses from churn and downgrades. It's about understanding the strength of your foundational revenue.

Essentially, GRR strips away the growth from expansion, allowing you to see the raw retention power of your product or service. It provides a clear, unvarnished look at customer loyalty.

The GRR formula

To accurately measure this retention, you'll need the gross retention formula:

GRR = (MRR at the start of the period - Churn MRR - Contraction MRR) / MRR at the start of the period

Where:

• MRR = Monthly recurring revenue
• Churn MRR = Revenue lost from customers who cancel
• Contraction MRR = Revenue lost from downgrades

Example calculation:

Imagine a SaaS company starts with $300,000 MRR. If they lose $30,000 to churn and $15,000 to downgrades:

GRR = ($300,000 - $30,000 - $15,000) / $300,000 GRR = $255,000 / $300,000 GRR = 0.85 or 85%

Thus, their GRR is 85%.

Why GRR matters

GRR acts as a vital health check for your core revenue streams. It helps you see if your product is truly sticky and if customers are consistently finding value. Here are three concrete reasons why GRR is so important:

• A strong GRR signals healthy customer satisfaction and product loyalty.
• It highlights potential issues with customer experience or product fit.
• GRR offers a predictable view of your base revenue — crucial for financial planning.

What is a good GRR benchmark?

Understanding how to interpret your GRR is key. Here’s an easy way to look at benchmarks:

• A rating of 80-90%: This range indicates a strong, healthy retention rate. It means your core product is resonating with customers.
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• A rating below 75%: This is a red flag, suggesting deeper problems with customer satisfaction or product issues.
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• Always below or equal to 100%: Because GRR only tracks revenue lost, it will always be 100% or less. Consistently low GRR shows that the company loses a large portion of its customer revenue.

Why SaaS companies should track both NRR and GRR

In the SaaS industry, relying on a single metric provides an incomplete picture. Therefore, tracking both NRR and GRR offers SaaS companies a dual-lens through which they can assess their business health and growth potential. 

The interplay between these two metrics reveals crucial insights that neither can provide alone. Let’s go over some of the key reasons why SaaS agencies should track both metrics:

Core vs. Expansion

As you know, GRR provides a clear view of core retention. It isolates the revenue retained from existing customers, stripping away the influence of expansion efforts. 

For SaaS companies, this is vital for assessing the stickiness of their core product or service. A consistently high GRR signals that the product delivers sustained value, fostering customer loyalty.

NRR, on the other hand, captures the overall revenue growth from existing customers, including expansions. It shows the net effect of upgrades, cross-sells, and downgrades, offering a holistic view of revenue dynamics. 

This metric is particularly important for SaaS businesses aiming to maximize customer lifetime value through strategic upselling and cross-selling.

Unmasking hidden problems

By tracking both NRR and GRR, SaaS companies can identify specific areas for improvement. For instance, a high NRR coupled with a low GRR might indicate that while expansion efforts are effective, core product satisfaction is lacking. 

Customers are upgrading, but they're also churning at a concerning rate. This scenario suggests a need to address fundamental product or service issues.

Conversely, a high GRR but low NRR could signal that customers are satisfied with the core offering but are not finding value in expansion opportunities. You’d have to review upselling and cross-selling strategies, pricing models, or product enhancements.

Forecasting your future footprint

NRR provides a strong indicator of future revenue potential. A high NRR suggests that the company can continue to grow its revenue base without relying solely on new customer acquisition. 

This info is especially critical for SaaS firms operating in competitive markets, where customer acquisition costs can be substantial.

GRR, meanwhile, offers a more conservative view of revenue predictability. It shows the minimum revenue that can be expected from existing customers, providing a stable foundation for financial planning. In volatile markets, this stability is invaluable for forecasting and budgeting.

Fine-tuning customer connections

The NRR vs. GRR relationship can inform and refine customer success strategies. By analyzing the discrepancies between these metrics, SaaS companies can tailor their customer engagement efforts to address specific pain points and opportunities.

For example, a low GRR might prompt a review of onboarding processes, customer support, or product usability. It could also lead to proactive outreach to at-risk customers, offering targeted solutions to prevent churn.

A low NRR, despite a healthy GRR, can highlight the need for more effective customer education or targeted promotions. It may also indicate that customers are unaware of the full range of product capabilities or the benefits of upgrading.

Note: Interested in learning more about key indicators of success? Read our post on growth metrics for a SaaS organization. 

Strategic sight

Tracking both NRR and GRR helps SaaS companies to make informed strategic decisions. These metrics provide valuable insights into customer behavior, product performance, and market dynamics.

They can guide decisions related to product development, pricing, sales, and marketing. By understanding the nuances of customer retention and expansion, SaaS businesses can allocate resources more effectively and drive sustainable growth.

Common mistakes in measuring revenue retention

Accurately measuring revenue retention is vital for SaaS agencies. However, several common pitfalls can lead to skewed results and flawed strategies. Understanding these mistakes is the first step toward reliable retention analysis. Let’s take a closer look at how to solve them:

Mistake 1: Ignoring customer segmentation

Treating every customer the same when calculating NRR and GRR can mask variations in retention rates. For example, enterprise clients may have different churn patterns and expansion opportunities compared to small businesses. 

Failing to segment customers by size, industry, or usage patterns can lead to inaccurate overall retention metrics.  

Solution: Implement robust customer segmentation. Divide your customer base into meaningful cohorts based on relevant criteria. Calculate NRR and GRR for each segment to pinpoint specific trends and address unique challenges.

Mistake 2: Overlooking contractions

Many companies focus solely on churn, neglecting the impact of downgrades or contractions. These reductions in revenue can significantly affect GRR and NRR, especially in tiered pricing models. 

Overlooking contractions can create a false sense of security, masking underlying issues with product value or pricing.

Solution: Include contractions in your calculations. Track downgrades and analyze the reasons behind them. Implement strategies to address these issues, such as offering tailored plans or addressing feature gaps. Regularly review and adjust pricing and plan structures.

Mistake 3: Relying solely on aggregate metrics

Relying solely on aggregate metrics can obscure important details. It's essential to dig deeper and analyze retention trends over time and across different cohorts. Failing to do so can prevent early detection of emerging issues.

Solution: Conduct a cohort analysis. Track retention rates over time for specific customer groups. Identify patterns and trends that may not be apparent in aggregate metrics.

Mistake 4: Disregarding customer feedback

Revenue retention is closely tied to customer satisfaction. Ignoring customer feedback can lead to inaccurate interpretations of retention metrics. If customers are dissatisfied with the product or service, they are more likely to churn or downgrade, regardless of other factors.  

Solution: Establish feedback loops. Regularly solicit customer feedback through surveys, interviews, and support interactions. Analyze feedback to identify pain points and areas for improvement. Use feedback to inform product development and customer success strategies.

Mistake 5: Confusing customer retention with revenue retention

Customer retention measures the percentage of customers retained, while revenue retention (NRR and GRR) measures the percentage of revenue retained. These are distinct metrics that provide different insights. Confusing them can lead to flawed interpretations and misguided strategies.  

Solution: Track both customer retention and revenue retention metrics. Understand the differences between them and use them in conjunction to gain a complete picture of customer and revenue health. Use both sets of data to inform strategic decision-making.

Mistake 6: Inconsistent timeframes

Using inconsistent timeframes for calculating NRR and GRR can lead to inaccurate comparisons and flawed trend analysis. It's essential to maintain consistency in the periods used for these calculations.  

Solution: Establish standardized timeframes for calculating NRR and GRR (e.g., monthly, quarterly, annually). Make sure that all calculations are performed using the same timeframes for accurate comparisons.

Mistake 7: Not accounting for seasonality

Some SaaS businesses experience seasonal fluctuations in customer behavior. Failing to account for seasonality can lead to misinterpretations of retention metrics.  

Solution: Analyze retention trends over multiple periods to identify seasonal patterns. Adjust calculations and forecasts to account for these fluctuations. Use historical data to predict and prepare for seasonal variations.

10 methods to improve NRR and GRR

To drive sustainable growth, SaaS companies must proactively work to enhance both net revenue retention (NRR) and gross revenue retention (GRR). Here are some effective and actionable methods:

1. Craft a stellar onboarding journey: Don't just onboard; create an experience. Personalize the initial user journey with interactive tutorials and dedicated check-ins to speed up time-to-value.
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2. Foster proactive customer dialogues: Move beyond reactive support. Implement regular check-ins and feedback sessions to anticipate customer needs and address potential pain points before they escalate.
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3. Architect a compelling value progression: Design your pricing tiers and product offerings to create a clear path for customers to grow with your solution. Highlight the benefits of each upgrade and make the transition seamless.
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4. Establish a continuous feedback ecosystem: Collect feedback but make sure to also act on it. Create a system for gathering, analyzing, and implementing customer insights across all departments.
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5. Empower customer success champions: Invest in training and resources for your customer success team. Equip them with the tools and knowledge to proactively guide customers and build lasting relationships.
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6. Curate targeted expansion opportunities: Go beyond generic upsells. Develop personalized recommendations based on customer usage and needs. Showcase how extra features or services can solve specific challenges.
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7. Ingrain customer-first principles: Make customer satisfaction a core value across the company. Train all employees to understand the importance of retention and empower them to contribute to customer success.
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8. Construct a robust self-service hub: Build a complete knowledge base with FAQs, tutorials, and troubleshooting guides. Help customers find solutions independently and reduce support inquiries.
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9. Personalize every interaction: Tailor communications, offers, and support to each customer's unique needs and preferences. Use data to create personalized experiences that resonate.
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10. Implement a customer health dashboard: Develop a system for tracking key customer metrics and spotting at-risk accounts. Always be ready to reach out to address potential issues and prevent churn.

FAQs

Can NRR be high while GRR is low?

Yes, NRR can be high while GRR is low, indicating strong upselling and expansion efforts are offsetting significant churn and downgrades.

Why track GRR if NRR is strong?

Tracking GRR provides insight into the stability of core revenue streams, revealing underlying customer satisfaction and product stickiness that NRR might obscure.

How does pricing affect NRR?

Pricing directly influences NRR through upgrades, downgrades, and customer churn; effective pricing strategies can drive expansion revenue and improve overall NRR.

What happens if GRR drops below 75%?

If GRR drops below 75%, it signals noteworthy revenue loss and potential issues with customer satisfaction or product value, necessitating immediate review and action.

How often should I measure NRR and GRR?

NRR and GRR should be measured, typically monthly or quarterly. Doing so helps track trends, spot issues early on, and inform strategic decisions going forward. 

Find out how Orb can help you keep NRR and GRR healthy

We've explored the critical roles of NRR vs. GRR in sustaining and growing your SaaS business. Effectively managing these metrics requires a billing platform that offers both precision and adaptability. 

That's where Orb steps in.

Orb helps SaaS and GenAI companies by unlocking their usage data, enabling dynamic pricing, accurate billing, and accelerated growth – all without the constraints of rigid billing systems. With Orb, you gain the tools to actively influence and optimize both your NRR and GRR.

Here's how Orb helps maintain healthy NRR and GRR:

• Agile pricing for optimal retention: Static pricing limits your ability to adapt to market changes, impacting both NRR and GRR. Orb decouples usage data from pricing metrics, allowing you to test various pricing models (like usage-based pricing).
  
  Quickly test new pricing models, iterate on existing ones, and fine-tune your monetization strategy. This agility helps you discover the optimal pricing that maximizes customer retention and expansion, directly improving both GRR and NRR.

• Precision billing to build and maintain trust: Inaccurate billing erodes customer trust and leads to churn, negatively affecting both GRR and NRR. Orb RevGraph ingests and processes all raw event data, ensuring precise, error-free invoices.
  
  This level of accuracy minimizes billing disputes, reduces churn, and prevents revenue leakage, all of which are essential for maintaining healthy retention rates.

• Extensible architecture for confident scaling: Orb's modular platform scales with your business needs. Its scalable API handles high-volume data ingestion, while the Orb SQL Editor simplifies data analysis.
  
  Built-in functions for billing, invoicing, and reporting provide a unified view of your revenue, making it easier to monitor and improve both NRR and GRR as you expand.

• Strategic partnership for lasting success: Transitioning to usage-based tracking and pricing can be challenging. Orb offers expert guidance and support to help you navigate this process.
  
  From implementation to ongoing optimization, Orb acts as a trusted partner, helping you achieve your retention goals. Orb provides industry expertise and proven migration pathways.

Ready to transform your revenue strategy and ensure healthy NRR and GRR? Explore Orb's flexible pricing options and find the perfect fit for your business.