Startups often use terms such as "net retention" and "gross retention" interchangeably. Entrepreneurs should understand the difference between the two.
Gross retention is the percentage of customers who remain active over time. In essence, it measures how many customers are still using your product or service after a certain period of time.
On the other hand, net retention considers both gross retention and churn (the percentage of customers who stop using your product or service). Instead of measuring how many customers are still active, net retention measures how many you are actually gaining over time.
Generally, you want your net retention to be higher than your gross retention. If you don't do this, you'll lose more customers than you gain, and that's not sustainable.
What is net retention?
An organization's revenue is measured by how much it generates and loses in a given month or year. Subscription businesses measure the income they retain from their customers over time. It is effective for a company to retain and grow its customers when it has a high net retention rate.
How to calculate net retention revenue?
To calculate net retention, take the total revenue at the end of a period and subtract any churned revenue. During a period, churned revenue refers to revenue lost due to customer attrition.
For example:
Company ABC had $100,000 in recurring revenue at the end of January. Three customers canceled their subscriptions in February, resulting in $10,000 in churned revenue. Company ABC’s net retention rate for February would be 90% (($100,000 - $10,000) / $100,000).
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