Revenue retention is a fundamental metric to a growing SaaS organization.
You can glean myriad insights from revenue retention, not to mention that a high revenue retention rate equals happy customers and investors. It’s a win-win.
Keep reading to learn more about revenue retention, including the different types, how to calculate your revenue retention, and what you can do to keep your retention rate high.
Table of Contents
- What is Revenue Retention?
- How to Calculate Revenue Retention
- Why Revenue Retention is Important
- How to Increase Your Revenue Retention Rate
What is Revenue Retention?
Revenue retention is the percentage of your revenue that is retained over a given period of time. Typically it’s measured monthly to align with your monthly recurring revenue (MRR).
Revenue retention is broken down into two categories:
- Gross Revenue Retention: The percentage of recurring revenue that you retained in a given period of time. This doesn’t include the revenue gained from upgrades, etc.
- Net Revenue Retention: The percentage of recurring revenue that you retained in a given period. This includes revenue that you gained because of existing customers upgrading their tiers or subscribing to new products.
Keep in mind that your revenue retention may not always match up with your customer retention, as the amount of revenue may fluctuate within your customer base over time (upgrades, downgrades, etc.)
How to Calculate Revenue Retention
To calculate your revenue retention rates, you’ll first need to know your revenue churn rate.
Note: Revenue churn, also known as MRR churn, is the percentage of monthly recurring revenue (MRR) your company lost from downgrades and cancellations in a given period of time.
Put simply, your gross and net revenue churn metrics are the opposite of your retention rates. Where your revenue retention rate is the amount of revenue retained in a given period of time, your revenue churn rate is the amount of revenue lost during this same period of time.
Both your revenue churn and your revenue retention metrics are typically displayed as a percentage.
For both gross and net revenue retention, you’ll need to subtract one from your gross and net revenue churn metrics, respectively. (Note: the formulas in bold are gross and net revenue churn.)
Gross Revenue Retention Formula
1 – [(Churned MRR + Downgrade MRR / MRR at the end of the previous month)]
Net Revenue Retention Formula
1 – [(Churned MRR + Downgrade MRR – Expansion MRR) / MRR at end of last month]
Let’s use an example to dig into this further.
Your MRR at the end of last month was $50,000. Throughout this month, you lost $3,000 in MRR to churn and downgrades. However, you gained $1,000 in MRR from customers upgrading their accounts.
The equation for your revenue retention rates would look like this:
Gross Revenue Retention: 1 – [($3,000 / $50,000)] = 94%
Net Revenue Retention: 1 – [($3,000 – $1,000) / $50,000] = 96%
Why Revenue Retention is Important
Understanding, tracking and working towards increasing your revenue retention are all indicators that you care deeply about your customers.
Additionally, a high revenue retention rate is a great measure of profitability, as it indicates how well you can retain and sell to existing customers — known in the business as “land and expand.”
If you are able to consistently retain and sell to your customers over time, you’ll soon see your Customer Acquisition Cost (CAC) come down, which directly translates to company growth.
These profitability indicators also mean that you’ll have a better understanding of your runway over time. If you know how much cash you’ll have in hand six months from now, then you’ll be able to develop plans and determine whether you need to start tapping new investors for additional capital.
How best to keep track of both your runway and growth? It’s a no-brainer. Having a financial model that reflects your most up-to-date metrics can help you to plan for growth, understand where you need to invest your time, and more.
How to Increase Your Revenue Retention Rate
As revenue retention is in direct opposition to churn, we can use the same tactics that we would to reduce churn to increase our revenue retention rate.
This starts and ends with keeping your customers happy, including (but not limited to) offering upgrades, investing in a customer success team, and finding unique ways to keep a customer that may be on the brink of churning.
Let’s dive into each of these examples further.
1. Offer Upgrades
As seen within the revenue retention calculations, upgrades matter. Providing options for your customers to purchase new features or services, upgrade to a more costly subscription tier or add-on complementary tools, can have a major impact on revenue retention.
Any opportunity for you to increase expansion MRR will mean an increase to your revenue retention rate.
2. Invest in Customer Success
Did you know that U.S companies lose more than $62 billion every year due to poor customer service?
That is a lot of dough that could be re-invested into a company. While you may want to focus solely on building your product in the early stages of your company, you should also have a customer service team lined up ready to keep those early customers happy.
3. Offer Alternatives to Churned Customers
Breakups are hard. But not all churned customers have to be a lost cause!
There are ample opportunities to offer alternatives to customers who may be ready to call it quits. This can include offering to downgrade to a lower tier or providing a short-term discounted rate to keep them as a customer.
Yes, a downgrade will affect your revenue retention rate, but a reduction in some revenue per customer is far easier to swallow than losing that customer completely.
Measure Your Revenue Retention Rate with Finmark
Revenue retention is one of the first metrics an investor will want to know about, and you’ll need to have the latest on hand when starting the fundraising process.
Don’t be caught off guard. Start building your financial model in Finmark today.