The Right Financial Metric for Customer Success: Gross Retention or Net Retention?
"If you need more revenue, invest in Sales."
Why is that the default—some might say "kneejerk"—response to the basic question of how to make more money?
One of the reasons Sales is such an obvious economic driver for companies is because its core Key Performance Indicator (KPI) is meaningful and well-defined: bookings.
But for businesses implementing Customer Success, many struggle with defining the final financial KPI. While everyone agrees that leading health score indicators (e.g., adoption, maturity, satisfaction, etc.) are what you should action day-to-day, every Customer Success team needs to define the final “lagging” indicator to use with finance, executives, and the board.
It shouldn't surprise you that that metric is retention. But unlike in Sales, there's debate over which retention metric to anchor upon: Gross Retention Rate (GRR) or Net Retention Rate (NRR).
GRR takes into account churn, but doesn’t benefit from expansion—hence the max is 100%. NRR includes expansion, and therefore can (and probably should for most companies) be over 100%. Click here to get more details on calculating these numbers.
Gross Retention vs. Net Retention
So how do you choose between GRR and NRR as an anchor KPI for your post-sales/CS organization?
I’ve thought about this a great deal as I’ve met thousands of companies over the years and realized that there isn’t a one size fits all solution. But I am convinced there's a framework to help you make the right decision for your company.
At first glance, it's tempting to automatically assume NRR is the better indicator because it synthesizes two revenue streams—the renewal and the upsell. In a nutshell, it includes more information. But that's not necessarily the case.
On one hand, GRR has an advantage over NRR in that it truly measures the long-term health of the business because gross churn erodes expansion opportunity over time. In other words, you can’t upsell clients that you lose!
On the other hand, an over-focus on gross retention and churn can lead to a point of diminishing returns.
And this focus has practical effects every day. Do I focus on the nth at-risk client and trying to save them (sometimes in futility) or take that energy and spend it on a healthy client ripe for expansion?
Strategy Architect: Empowering Companies to Transform, Innovate, and Enrich the Human Experience Globally
6 年Thought provoking. How do you recommend factoring in the costs associated with high maintenance clients so you know if the net is better to let them go or to work to keep them?
"It is not necessary to change. Survival is not mandatory." - W. Edwards Deming
6 年Never forget what Drucker said... "the purpose of business is to get and keep customers".
Customer Success industry advisor | University Lecturer | Author | Co-author of the book, Mastering Customer Success
6 年“In other words, you can’t upsell clients that you lose!” All companies should hang this in their lobbies.
Senior Customer Success Leader | Experienced, Award-Winning Post-Sales Leader Proven Experience In Building & Scaling Customer-Led Growth Engines
6 年With any measurement I try to think of what behavior we are trying to drive and then select the most appropriate measure. Like Glenn Oclassen, Jr., I think both have a value independently but the correlation between the two gives you direction where to focus your energy and resources.
Enterprise Customer Success Executive, technology start-up advisor
6 年I look at both, as each tells me a lot, and the interaction between the two measures gives me insights as to where to probe further into who, why, and other key drivers of the change.