This is the fourth in our series of articles on the latest SaaS benchmarks, focusing on revenue retention. In an environment of rising costs and pressure on profits, understanding and optimising revenue retention is more important than ever for SaaS companies.
Key take-aways from 2023: the importance of revenue retention
Understanding revenue retention in SaaS
Revenue retention, at its core, measures the ability of a company to retain its customers and revenue over time. It is a critical indicator of customer satisfaction, product value, and overall company health.
Revenue retention is measured through metrics such as net revenue retention, also known as net dollar retention (NDR), gross revenue retention, and churn rate.
What is gross revenue retention?
Gross Revenue Retention refers to the percentage of revenue retained from existing customers within a specific timeframe, typically a year. It’s a vital indicator of customer loyalty and product value, as it reflects the company’s ability to maintain its revenue base in the face of customer churn and downgrades.
Key points about gross revenue retention:
Measures churn impact: Gross revenue retention looks at the amount of revenue retained from a prior period after taking into account revenue lost due to customers cancelling (churn) or downgrading their services.
Gross revenue retention focuses solely on the retained revenue from existing customers, not accounting for any additional revenue gained through upselling or cross-selling.
Usually quoted an on annual basis. This an be measured either over a year or annualised from a shorter time period.
Indicator of customer satisfaction and long-term revenue stability.
How is gross revenue retention calculated?
Gross revenue retention is calculated as shown below.
Gross revenue retention formula by ScaleXP – https://scalexp.com
Gross revenue retention is generally calculated as one minus the sum of annual revenue from all lost and downgraded contracts divided by recurring revenue a year ago. In other words, 100% less the % revenue lost over the course of the year. In many cases, the churn rate is calculated on a monthly basis and multipled by 12 to get to an annual rate. Similarly a quarterly rate can be annualised by multiplying churn by 3 and then subtracting from 100%.
What is net revenue retention?
Net revenue retention refers to the percentage of recurring revenue retained from existing customers over a specific period, usually a year, including any additional revenue from upsells, cross-sells, or price increases, while also accounting for churn and downgrades. It provides a view of customer retention which includes increases in the base retained.
Key points about net revenue retention:
How is net revenue retention calculated?
Net revenue retention is calculated as shown below.
Net revenue retention formula by ScaleXP – https://scalexp.com
Net revenue retention is calculated by taking all expansion revenue generated over the period and subtracting all revenue lost or downgraded. This is divided by total recurring revenue from the prior period to get the net churn rate as a percentage which is then added to 100% to get the net revenue retention rate. The usual measurement period is one year. Often this is generated by calculating the net revenue churn rate for a shorter period and multiplying by the number of periods in a year — so 12x monthly net churn or 3x quarterly net churn. This is then added to 100 to get the annual revenue retention rate.
How is customer retention different from revenue and logo retention?
Customer retention rate refers to the ability to retain customer numbers, irrespective of relative size.
Revenue retention looks at the monetary value of customer retained rather than the number of customers.
Customer retention and churn rates are also sometimes called logo retention and churn rates to indicate that it is the customer group being measured rather than the individual person.
Importance of revenue retention for SaaS companies
Revenue retention is critical for company valuation as it proves long-term value and profitability. Investors are now placing more emphasis than ever on long-term strategic advantage built on strong product and high levels of customer loyalty as evidenced by high retention rates.
Here are some of the reasons high revenue retention rates are so highly valued by investors:
What are the latest SaaS revenue retention benchmarks?
The table below shows the average net revenue retention rate and gross revenue retention rate for SaaS companies by size in 2023 and prior years. This reflects a survey of over 3,500 SaaS companies across the globe by OpenView Partners.
Despite increased investor focus on revenue retention as a measure of success, many SaaS companies found 2023 challenging as their customers were also under increased pressure to demonstrate efficiency and cut costs. Median gross and net retention rates were flat or reduced versus the prior year for companies of every size, in most cases dropping 5 percentage points or more in gross revenue retention 0 from the low/mid 90s to the 80s – and falling closer to 100% on a net revenue retention basis.
The chart below illustrates the challenges faced by SaaS companies this year, with even the top quartile generally retaining only 95% or less of customer revenue before taking into account offset from price increases, some 5 percentage points lower than last year. This reflects the impact of challenging economic conditions and high levels of scrutiny of purchases, including consolidation of vendors by purchasers.
Net revenue retention was also signficantly lower than last year, most notably for larger and higher performing companies who tended to be more reliant on expanding existing customer revenue relative to gaining new customers. Net revenue retention was, on average, at or near 100% across most revenue bands.
Strategies for improving revenue retention
What can we expect in 2024?
As we move into 2024, the focus on revenue retention is expected to intensify. SaaS companies that can demonstrate strong retention metrics are likely to see continued investor interest and market success.
At ScaleXP, we undertand the importance of revenue retention in SaaS businesses. Our platform provides comprehensive automated insights into your revenue retention metrics, integrating seamlessly with your accounting and CRM systems. To explore how ScaleXP can help you optimise your revenue retention strategies and automate your SaaS metrics, click here.