Matan Hazanov breaks down net retention vs. gross retention for software companies. High net retention with low gross retention signals bad-fit customers from inefficient marketing. Top performers hit over 100% net retention, meaning they expand revenue within existing customers.
Over 100% net retention.
For example, if you have high net retention but low gross retention, which is possible, that usually means that there's a lot of money wasted on marketing efforts that are bringing in customers that aren't a good fit. So what you should do in this case is actually do a cohort analysis. You look at where your marketing spend is going and you look at the churn based on the different strategies or the different types of customers you're targeting to try to identify where your marketing is going wrong and bringing in the kinds of customers that are churning too quickly. This also can indicate a problem internally, such as customer service. So you want to look at your customer service teams or your upselling teams and see why a lot of customers are leaving. But some customers are growing. And top tier performance for a startup, or really for any business, is over 100% in net retention, meaning that from the same base of customers, you're generating more revenues every year, which is an indication that there's constantly products and features being added and that you can expand the revenues from your existing customer base.
