The world’s software as a service or “SaaS” market is growing at a tremendous pace and is projected to hit as much as $623.3 billion in total value as early as 2023. Despite this incredible growth, small companies in the space face many challenges when making their mark.
Organizations in need of a diverse range of SaaS tools are increasingly paying attention to the way these tools impact their bottom lines and what the overall return on investment is from each application in their arsenal.
This is reflected in SaaS management platform usage rate projections - Gartner reports that 50% of companies with more than one SaaS app in play are expected to manage these from a central platform by 2026.
It’s up to individual SaaS companies to retain customers with killer features and support. But first, company leaders must learn to retain revenue and measure their own economic performance amid moving market pressures.
What is revenue retention?
Revenue retention may sound similar to customer retention, but the two are different concepts. Whereas customer retention rates reflect on your business’s ability to keep customers from jumping ship, revenue retention signals whether your company is poised for growth.
More specifically, your business’s net revenue retention rate is the total amount of revenue it has managed to retain over a given period of time. Revenue retention stands in stark contrast with revenue churn - the two concepts are effectively polar opposites.
Revenue churn is the amount of revenue your organization has lost over a given period of time. Because churn and retention are so closely linked, you can address issues with one by improving the other and vice versa. However, revenue retention comes in more than one form - gross and net retention. Both of these are calculated in their own way and can yield unique insights regarding your company’s performance.
What is gross revenue retention?
Gross revenue retention is the most widely applicable measurement of revenue retention you can calculate. It measures recurring revenue retained from your current stock of customers over a given period of time. What makes this stat so special is the way it ignores data points like upgrades, yielding a consistent percentage representing total revenue retention across an organization.
Companies in the SaaS space report a median gross revenue retention rate of about 90%. This indicates a loss of 10% of all recurring revenue from existing customers is normal and expected throughout the industry.
To calculate your own gross revenue retention rate, you can use the following formula:
Gross retention = ((total revenue - revenue churn) / total revenue) x 100
In the formula above, ‘revenue churn’ is the total revenue lost due to customers downgrading their plans or canceling their subscriptions.
What is net revenue retention?
Net revenue retention differs from its gross counterpart in that it tracks not only the effects of churn, but those of upgrades, expansion and upsells as well. This makes it easier for company leaders to keep track of revenue growth potential over time. Net revenue retention can also serve as a valuable customer satisfaction measurement, proving customers are not only sticking with your business, but they are also buying more from you over time.
The formula used to calculate net revenue retention is as follows:
Net retention = ((total revenue + revenue expansion - revenue churn) / total revenue) x 100
In this formula, revenue expansion refers to monetary increases in existing customer accounts. This can include anything from upsells to cross-sells.
Gross vs net retention saas
Both gross retention and net retention can be used to track the dynamics of your organization’s profits and customer base. Choosing between the two comes down to fully understanding what each metric is most appropriate for. Here is a recap:
Gross retention rate - This metric ignores revenue expansion, upsells, and upgrades and is best for big picture planning regarding the overall stability of your current revenue streams.
Net retention rate - Your net retention rate accounts for upsells and cross-sells. Owing to this, net retention as a metric can help you drill into the details surrounding your current customer expansion efforts and bolster the effectiveness of your upselling and cross-selling strategy.
Let VeryCreatives help boost your SaaS revenue
There are numerous avenues worth exploring to help take your SaaS company’s profits to the next level. However, throwing ideas at the wall to see what sticks could cost you valuable customers.
Partnering with a digital product agency that knows the ropes of the industry and can guide you from win to win will make all the difference in the long run. Help your SaaS business reach its goals by booking a call with VeryCreatives.