Decoding Retention Rates

Imagine your sales team goes on vacation for the next year and you all come back to 20% growth.* That’s pretty powerful, right? Well that is a 120% Net Retention Rate. It’s the best-in-class for any SaaS business. Anything over 100% is inherent growth within a SaaS business model.

In my last post, I decoded the ARR and its components. With the expansion, erosion, and churn components, you have what you need to calculate a Gross Retention Rate and Net Retention Rate. Here are the underpinnings of the calculation.

To truly achieve on this metric, so much needs to come together: great onboarding, valued service, high product quality, strong service & support, effective pricing, expansion sales execution, and so much more. 120% is typically best-in-class, but you’re doing pretty well if you’re over 110%. This can be seen in OpenView’s 2023 benchmarking. Earlier stage SaaS businesses (<$10m) don’t have the adjacent services for cross-sell so they are limited to growth through maybe one other service and subscription add-ons; thus 100% — 110% NRR. Consumption businesses (e.., Snowflake) have an high NRR, because customers typically start with a smaller ‘land’ and can greatly expand usage where they see value.

GRR and NRR are cohort based metrics. A common land mine is to let expansion from customers that were acquired in the past year into the calculation. This can inflate the numerator. Similar effect happens with churn less than one year, but it hurts the metric instead. I typically keep these amounts as new business for up to 12 months after initial acquisition to keep the NRR and GRR calculations clean.

* Hey, Account Managers and Customer Success Managers out there. I’m illustrating a point here. Of course any type of expansion requires a lot of work and effort for customers to see value out of services and be successful. You rock!