Net Retention
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Net and gross retention rates are two important metrics for measuring customer success. Net retention rate measures the percentage of revenue retained from existing customers over a specific time period, while gross retention rate measures the percentage of customers retained over the same period.
Both net and gross retention rates are time-bound metrics, meaning that they must be measured over a specific time period. The most common time periods used are monthly, quarterly, and annually. When reporting on net or gross retention rate, it is important to specify the time period being measured.
Gross retention rate is calculated by dividing the number of customers at the end of a time period by the number of customers at the beginning of the period. For example, if a company has 100 customers at the beginning of a month and 90 customers at the end of the month, its gross retention rate for that month would be 90%.
Net retention rate is calculated by multiplying the gross retention rate by the average revenue per customer (ARPC).
The best way to visualize net and gross retention rates is with a waterfall chart. A waterfall chart shows the starting ARR, churn, contraction, expansion, and ending ARR. The Y-axis of a waterfall chart is typically dollars, while the X-axis shows the time period being measured.
Net and gross retention rates can be used to measure the health of a company's customer base. A high net retention rate indicates that a company is successfully retaining its customers and growing its revenue. A low net retention rate can indicate that a company is losing customers and/or not growing its revenue quickly enough.
Net and gross retention rates are important metrics for measuring customer success. By tracking these metrics, companies can identify trends in their customer base and make adjustments to their customer success strategies as needed.