Gross Revenue Retention (GRR)

Gross Revenue Retention (GRR) is a key performance metric that measures a company's ability to retain revenue from its existing customers over a specific period. Think of it as the ultimate loyalty test. It calculates the percentage of recurring revenue kept from the current customer base, but with a crucial twist: it only accounts for revenue lost through cancellations (known as churn) and downgrades. It purposefully ignores any expansion revenue from upsells, cross-sells, or price increases. This makes GRR a pure, unvarnished measure of customer satisfaction and product stickiness. While particularly vital for Software as a Service (SaaS) and other subscription-based businesses, its principles are valuable for any investor trying to understand the stability of a company's core revenue. A high GRR signals that customers are happy with the product as-is and are not leaving or reducing their spending, which is a fantastic sign of a healthy business.

Calculating GRR is straightforward and reveals the true health of a company's customer base, without the flattering effect of new sales or upgrades. The formula strips everything back to the core question: of the revenue you had at the start, how much is left from that same group of customers, ignoring any new money they spent? The formula is: GRR (%) = (Starting Recurring Revenue - Revenue from Churned Customers - Revenue from Downgrades) / Starting Recurring Revenue x 100

Let's imagine a company, “SaaS-Co,” starts the year with $500,000 in Monthly Recurring Revenue (MRR).

• During the year, customers who cancelled their subscriptions accounted for a loss of $30,000 in MRR (Churn).
• Other customers downgraded to cheaper plans, resulting in a loss of $10,000 in MRR (Downgrades).
• The sales team did a great job and generated $50,000 in MRR from upselling existing customers to premium plans. For GRR, we ignore this.

Here’s the calculation:

1. GRR = ($500,000 - $30,000 - $10,000) / $500,000
2. GRR = $460,000 / $500,000
3. GRR = 0.92, or 92%

This means SaaS-Co successfully retained 92% of its original revenue base before accounting for any expansion.

For a value investor, who seeks durable, predictable businesses, GRR is a treasure map. It points directly to companies with strong underlying fundamentals and a loyal customer following, which are hallmarks of a deep competitive advantage, or “moat.”

Because GRR filters out the noise from expansion revenue, it provides a raw, honest look at the value of a company's core offering. A high GRR (typically above 90%) suggests that the product or service is essential to its customers. They stick around not because a salesperson convinced them to buy more, but because they genuinely rely on the service. This “stickiness” is a powerful indicator of long-term pricing power and resilience against competitors.

Imagine a company's revenue is a bucket of water. Churn and downgrades are holes in that bucket. A company might have a fantastic Net Revenue Retention (NRR) rate of 110%, suggesting healthy growth. However, if its GRR is only 80%, it means the bucket is very leaky. The company is losing 20% of its revenue from existing customers each year and is having to work incredibly hard (and spend a lot on sales and marketing) just to patch those holes and grow. A value investor prefers a bucket with very few leaks—a high GRR—because it signals a more efficient, stable, and less risky business model.

It's crucial not to confuse GRR with its cousin, Net Revenue Retention (NRR). While both measure revenue from existing customers, they tell different parts of the story. An astute investor always looks at both together.

• Gross Revenue Retention (GRR): This is your defensive metric. It measures your ability to hold on to your existing revenue. Its maximum possible value is 100%. It answers the question: “How good are we at preventing customers from leaving or spending less?”
• Net Revenue Retention (NRR): This is your offensive and defensive metric combined. It includes all the revenue changes from your existing customer base—churn, downgrades, and expansion from upsells and cross-sells. It can exceed 100%. It answers the question: “How good are we at growing revenue within our current customer base?”

The dream scenario is a high GRR paired with an even higher NRR. This indicates a company that not only keeps its customers but also successfully grows with them over time.

“Good” is always relative, but some benchmarks can help guide your analysis.

• For SaaS companies selling to small and medium-sized businesses (SMBs): A GRR of 85%-95% is often considered strong, as smaller businesses tend to be less stable.
• For SaaS companies selling to large enterprise clients: The bar is higher. A GRR of 95% or more is the goal, as enterprise customers have higher switching costs and churn less frequently.

Ultimately, the most important thing is not a single number but the trend. A company with a stable or improving GRR is far more attractive than one with a high but declining GRR. Always compare a company's GRR to its direct competitors and its own historical performance to get the full context for your valuation and financial modeling.