Many articles aimed at subscription sellers stress the importance of customer retention. To be sure, keeping subscribers around is a core need for your business. But if you’re only looking at the percentage of customers who stick around from one month to the next, you could be missing an important part of the picture.
Gross revenue retention and net revenue retention help you evaluate the success of your revenue stream. Both metrics look at how your monthly recurring revenue (MRR) changes from one month to the next, as well as focus on your existing subscribers rather than new sales.
These metrics sound similar, but you won’t learn everything you need to know about revenue retention from just one of them. The question for most sellers shouldn’t be which of these metrics to track. It should be when to use gross retention vs. net retention in your business strategy planning.
Your gross revenue retention is the percentage of subscription dollars you retain each month, not counting any money added through upsells or cross-sells. Since we’re measuring retention, you won’t be looking at revenue from new subscriptions.
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It’s easy to calculate your gross revenue retention (GRR) rate. First, you’ll need your MRR from the beginning of the calculation period — usually a month, though you can calculate GRR over longer periods. Then, you’ll need a list of each downgrade or cancellation your company processed over the calculation period and the dollar amount you lost from each. Subtract these losses from your beginning MRR, then divide the result by your beginning MRR and multiply the answer by 100. This will show you the percentage of your beginning revenue that’s still on your books.
Your GRR can never exceed 100 because this calculation does not take any form of revenue growth into account. A GRR of 100 means you didn’t lose any customers to churn or see any downgrades during your calculation period.
If your calculation period is longer than your subscription term, make sure you’re only including relevant data. For example, your six-month GRR wouldn’t include the revenue loss from a customer who signed up during month two and then churned during month four. This person wouldn’t have been included in your beginning MRR, so including their churn would make your GRR look lower than it actually is.
Since gross revenue retention doesn’t include cross-sells, upsells or growth from new customers, it solely analyzes retention.
Retention is the key to long-term viability for a subscription business. Every subscription product has a limited customer base, and there are only so many upsells and cross-sells you can make to your existing customers before you’ve maxed out the value you can provide. Your best bet is to cultivate your subscribers into loyalists, the customer group responsible for around 80% of subscription income.
More loyalists mean a higher GRR. Achieving a GRR of 100% would indicate you didn’t lose any customers to churn or downgrades over the month. That means your subscribers are happy with your services and feel they’re getting good value for their money.
On the other hand, a monthly GRR of 50% would mean you lost half of your existing revenue. A company in this position would need a lot of sales and upsells to keep its revenue steady. Putting resources toward these efforts takes away from your ability to provide an excellent customer experience to current subscribers, which, in turn, causes more dissatisfied customers to cancel their subscriptions. This is a dangerous cycle for subscription businesses, and you don’t want to end up in it.
Focus on giving your subscribers the features that keep them around to increase your GRR. Of more than 2,000 subscribers included in our June 2023 Subscription Commerce Readiness Support, 30% cited a “bad experience with customer service” as a top reason to cancel a subscription. Other dealbreakers included the loss of perks like free shipping (42%) and the inability to customize the experience by pausing or skipping shipments (32%).
Keep your customer service on point by hiring a robust, well-trained team and standardizing responses so all customers receive the same good service. You should also invest in a subscription management platform that allows for self-service (like customizing orders and shipment frequency) so customers can build their ideal experience. Gather data points along the way from product ratings, NPS surveys and post-churn questionnaires to find warning signs of impending churn. Then implement churn management tools that address common sticking points.
You may also want to revisit your marketing and sales priorities. Are you targeting customers who are likely to become loyalists? Narrowing your target audience may increase your customer acquisition cost (CAC), but if it also increases GRR and customer lifetime value (CLTV), you’ll be setting yourself up for long-term success.
Your net revenue retention is the percentage of subscription dollars you retain and add each month. It includes any new subscription revenue from current subscribers added through cross-sells or upsells (but not new sign-ups).
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Calculating net revenue retention (NRR) is almost as easy as calculating your GRR. You’ll just need to add two data points: dollars added through upsells and dollars added through cross-sells during the calculation period. Just make sure you’re not including upsell or cross-sell revenue from one-off sales. This doesn’t count as “retention” revenue as it won’t be repeated next month.
Unlike GRR, your NRR can exceed 100% of your losses due to churn, or if downgrades are less than your gains through upsells and cross-sells. There’s theoretically no ceiling for NRR. Just make sure your calculation doesn’t include upsells and cross-sells to customers who signed up after the start of the calculation period. Their subscriptions weren't included in your beginning MRR, so including additional revenue will inflate your NRR above its actual value.
Net revenue retention shows how effective your team is at finding new monetization opportunities. If your NRR is exactly 100%, that means you’re upselling enough to offset any losses due to churn or downgrades. Add in the revenue from new subscribers, and your company is on a growth trajectory. An NRR that exceeds 100% means even faster growth.
If your NRR drops below 100%, it’s not necessarily a sign of hard times. After all, you can balance those losses out by selling more subscriptions. But an NRR that’s below 100% and decreasing by the month shows a bigger issue — either you’ve reached the limit on monetizing your customer base, or you’re seeing enough churn that even upgrades and cross-sells can’t make up for it.
Subscription merchants tend to look at their NRR more than their GRR because it’s almost always a bigger number. Just don’t let NRR distract you from thinking about how to reduce churn. Take a high NRR as an indicator of extreme customer satisfaction — after all, a subscriber will only spend more with you if they’re a big fan. Your goal should be to improve your relationship with less-satisfied customers, so they move from a churn risk to an upsell opportunity.
Pushing your net revenue retention over 100% will help you grow your subscription business. Increasing this figure means thinking carefully about your pricing strategies. For instance, could you offer a tiered pricing strategy to increase your revenue from a particular customer segment? Are you offering upsell opportunities at the right times and price points to induce customers to buy?
Use your customers’ behavioral data to determine the best time to pitch an upsell or cross-sell. Maybe a subscriber who just left a five-star review on your product will be more willing to splurge on add-ons. Or buyers who have been with you for a couple of months may tend to increase subscription frequency when they realize they’d like more of a product. Train your customer service team to spot and capitalize on these opportunities, or set behavioral triggers in your subscription management platform to automate upsell and cross-sell offers.
Neither gross revenue retention nor net revenue retention tells the whole story of your company’s prospects. Hopefully, you’re also keeping track of your revenue churn (a metric that’s closely related to GRR and NRR). Digging into revenue and customer churn rates, plus revenue and customer retention rates, can help you understand who is happy with your product and who doesn’t see the value you offer.
Your CAC:CLTV ratio is another important indicator of your company’s health and one you shouldn’t ignore just because you have a high GRR and NRR. Depending on your CAC payback period, you may need a high NRR just to break even with your marketing costs. If optimizing your GRR or NRR causes any of these other important metrics to go in the wrong direction, it may be time to reassess your strategy.
Data about your retention success is the best foundation for efforts to improve your gross and net revenue retention rates. Merchants who don’t have a way to track their customers (and make decisions based on that data) are in danger of being left behind. In our June 2023 Subscription Commerce Readiness Report, we saw a widening gap in retention and conversion rates between top-performing subscription merchants and the rest of the field. You don’t want to end up on the wrong side of that divide.
We help ecommerce merchants optimize their sales and retention processes with built-in reports and dashboards that uncover trends in customer behavior and show how effective your customer service is. You’ll also be able to dig deep into order data to learn more about your best-performing products. This type of data is invaluable to subscription sellers who are serious about providing the best experience to every customer. Taking your NRR and GRR seriously means doing just that.
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Discover the past year’s subscription trends to inform your 2024 ecommerce strategy. Our research with PYMNTS.com covered consumer behavior for each quarter of 2023.
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Watch episode eight of The Ecommerce Minute to learn the metrics you should measure to ensure long-term success for your ecommerce business.
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