Welcome to another episode of SaaS Metrics School! I'm Ben Murray, and today we’re tackling a critical question that came up in my SaaS Metrics Foundation course: What is the impact of Gross Revenue Retention (GRR) on SaaS valuation? This is a crucial topic for any SaaS founder, CFO, or operator looking to understand how to drive valuation growth by mastering key retention metrics.

What is Gross Revenue Retention (GRR)?

GRR is the percentage of recurring revenue retained from your existing customer base after factoring in churn and contraction. It’s one of the most important SaaS metrics, as it shows how well your company holds onto revenue from current customers. For SaaS businesses, especially those with larger Annual Contract Value (ACV) deals, a high GRR (95% or above) is considered best-in-class.

Why Does GRR Matter for Valuation?

Private Equity (PE) firms and investors often look at GRR to assess a company’s financial stability. For example, I recently spoke with a PE firm that targets SaaS companies under $10 million ARR. They require a GRR of 90% or above to even consider an investment. If your company can’t calculate GRR or has a GRR below 90%, it’s often a hard pass for investors.

This illustrates just how important it is to calculate GRR correctly. You need to annualize it properly and track it consistently to make sure your revenue retention meets or exceeds investor expectations. Without a solid GRR, securing a favorable valuation becomes much more challenging.

How to Calculate GRR Correctly

To calculate GRR, you need to track your recurring revenue over time, accounting for lost revenue from churn and contract downgrades. A strong GRR signals to investors that your SaaS business is not just growing through new customer acquisition but is also retaining its existing customers effectively.

Benchmarking Your GRR

Benchmarking is key, but it must be done against the right peers. A company selling $200,000 contracts has different retention expectations compared to one offering a $20/month product. Using tools like BenchmarkIt.ai by Ray Rike or SaaS KPI Benchmarks, you can get personalized benchmarks that provide a clearer view of where your business stands relative to others with similar profiles.

Valuation Impact of GRR

When it comes to valuation, investors and potential buyers place a high premium on predictable and stable revenue. Companies with a high GRR demonstrate stronger financial health, which can lead to better valuations. If your GRR fluctuates or is consistently low, it can hurt your valuation or result in missed investment opportunities.

Key Takeaways:

1. Calculate your GRR accurately and annualize it.
2. Benchmark your GRR against relevant SaaS companies with similar customer profiles.
3. Understand that a high GRR directly impacts your company’s valuation, especially in discussions with investors and potential buyers.
4. Track GRR monthly to identify trends and make adjustments before they affect your business’s financial health.

GRR is a must-have metric for your board, investors, and internal financial health. Regularly monitor and benchmark it to stay on track for SaaS success. If you found value in this episode, I’d love a 5-star rating and review!

Relevant Links:

- BenchmarkIt.ai - Custom benchmarks for your SaaS business
- SaaS KPI Benchmarks - Personalized benchmarking tool for SaaS companies

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