Gross Retention vs Net Retention: SaaS Metrics That Power Manufacturing Growth

Manufacturing companies are not just about machines, materials, and labor anymore. Many are adding software, data dashboards, and connected services on top of their physical products. That might look like:

• Remote monitoring subscriptions
• Monthly access to performance dashboards
• Annual contracts for predictive maintenance
• Seats for plant managers and engineers on an analytics platform

Whether you call it “SaaS,” “Industry 4.0,” or simply “recurring revenue,” the moment you start billing customers on a subscription basis, gross retention vs net retention becomes just as important as your traditional manufacturing KPIs.

You may already track metrics like contribution margin, cost of goods sold (COGS), and fixed vs variable costs. For a SaaS or subscription line, gross retention and net retention sit in that same group of critical numbers. They tell you whether your existing customer base is:

• Stable
• Slowly shrinking
• Quietly generating growth even before you close new deals

This article explains gross retention vs net retention in clear, practical terms, using situations that make sense for manufacturing owners, and connects these SaaS metrics to the rest of your financial picture.

Why SaaS Retention Matters for Manufacturers

For a long time, manufacturing growth depended on new customers, more volume, and better pricing. Those drivers still matter, and you still need strong manufacturing KPIs and metrics and healthy business performance metrics.

But once you add recurring revenue, there is a new question:

“Are our existing customers continuing to pay us, and are they paying us more over time?”

Gross retention and net retention answer that question from different angles. Together, they show:

• How much subscription revenue you keep from your starting customer base
• How much you lose to churn, cancellations, and downgrades
• How much you gain from upgrades, add-ons, and expansion

For manufacturers building a SaaS or “connected services” line, these numbers influence:

• Cash flow stability
• Long-term profitability
• The valuation of the business, especially if you ever plan on selling your company or attracting outside capital

Gross retention vs net retention should sit on the same dashboard as your financial KPIs, cash flow strategies, and manufacturing benchmarking guide.

The Building Block: Recurring Revenue from Existing Customers

Before defining the two metrics, it helps to be clear about the “starting pot” of revenue.

When tracking retention, you focus on recurring revenue from existing customers at the beginning of a period—often a year.

You do not include:

• One-time implementation fees
• Hardware sales
• New customers that sign up later in the year

You only look at the recurring revenue those beginning-of-year customers generate over time. Then, you track what happens:

• Some customers stay and pay the same
• Some downgrade or cancel
• Some upgrade or add more users, features, or locations

Gross retention and net retention look at the same starting group of customers, but they treat upgrades and expansion differently.

What Is Gross Retention?

Plain-language definition

Gross retention measures how much recurring revenue you keep from your starting customer base without counting any upgrades or expansion revenue. It focuses only on what you lose from churn and downgrades.

You can think of it as:

“How much of our original recurring revenue survived the year if we pretend upgrades do not exist?”

Gross retention formula

For a given period:

Gross Retention (%) = (Starting Recurring Revenue – Revenue Lost from Cancellations and Downgrades) ÷ Starting Recurring Revenue × 100

Where:

• Starting recurring revenue is the subscription or contract revenue from existing customers at the beginning of the period

• Revenue lost is the recurring revenue that disappears due to cancellations, non-renewals, or downgrades

Example in a manufacturing context

Suppose your company sells a connected monitoring platform for your machines. At the start of the year, existing customers generate $1,000,000 in annual recurring revenue (ARR).

During the year:

• Some plants shut down lines or cancel contracts, and you lose $100,000 in ARR from those customers
• Some customers upgrade to higher tiers, but gross retention ignores upgrades

Your kept revenue from the original base is:

• $1,000,000 – $100,000 = $900,000

Gross retention is:

• $900,000 ÷ $1,000,000 × 100 = 90%

A 90% gross retention rate means you kept 90% of your starting recurring revenue, before you consider any extra spending from those customers.

What gross retention tells you

Gross retention highlights the stability and satisfaction of your current customer base:

• High gross retention suggests good onboarding, fit, and ongoing value

• Low gross retention signals issues with product-market fit, support, or contract structure

If your gross retention is weak, you are constantly replacing lost revenue, and it will show up in your cash flow challenges and your financial risk management plan.

What Is Net Retention?

Plain-language definition

Net retention measures how much recurring revenue you keep from your starting customers after including both losses and gains. It accounts for:

• Cancellations and downgrades

• Upgrades, add-ons, extra users, and other expansion revenue

In simple terms:

“At the end of the period, do our existing customers pay us more or less than they did at the beginning?”

Net retention formula

For the same group of starting customers:

Net Retention (%) = (Starting Recurring Revenue – Revenue Lost + Expansion Revenue) ÷ Starting Recurring Revenue × 100

Where:

• Expansion revenue is extra recurring revenue from upgrades, added modules, higher tiers, or more users from the same customer group

Example with the same starting point

Using the earlier example:

• Starting ARR: $1,000,000
• Revenue lost to churn and downgrades: $100,000
• Expansion revenue from upgrades and add-ons: $220,000

Final recurring revenue from those same customers is:

• $1,000,000 – $100,000 + $220,000 = $1,120,000

Net retention rate is:

• $1,120,000 ÷ $1,000,000 × 100 = 112%

Now your net retention is 112%, which means your existing customers, as a group, pay you 12% more than they did at the start of the year.

What net retention tells you

Net retention reflects the growth potential inside your current customer base:

• Below 100%: The base is shrinking
• Around 100%: The base is stable but not driving growth
• Above 100%: Existing customers are expanding and helping fuel growth

For a manufacturer with a SaaS line, strong net retention means your recurring revenue grows even before you sign new contracts. That also supports stronger margin analysis, better operating income and EBITDA, and more predictable cash flow forecasting.

Gross Retention vs Net Retention: The Core Difference

Both metrics look at the same starting revenue base and the same customers. The difference is how they treat expansion.

• Gross retention ignores upgrades and add-ons and focuses only on what you kept versus what you lost
• Net retention adds expansion revenue back in and shows the final result for that customer group

From a management point of view:

• Use gross retention to assess risk and customer satisfaction
• Use net retention to measure growth momentum within your existing base

Together with your manufacturing metrics dashboard, these numbers give a clearer picture of how resilient and scalable your SaaS line really is.

What “Good” Looks Like for Manufacturing-SaaS Hybrids

Exact targets vary by industry and stage, but some general benchmarks are helpful as you build your own expectations.

For many SaaS businesses:

• Gross retention

  • Under 80%: Serious churn issues

  • 80–90%: Needs attention

  • 90–95%: Solid

  • 95%+: Strong

• Net retention

  • Under 90%: Base is shrinking

  • 90–100%: Stable but not a true growth engine

  • 100–110%: Healthy expansion

  • 110%+: Excellent expansion from existing customers

Manufacturing-linked SaaS sometimes has higher retention because the software is tied to physical equipment and production processes. However, if value is not clear, or implementation is weak, churn can still climb quickly.

A fractional CFO in manufacturing or a dedicated financial controller can help you set realistic retention targets, taking into account your pricing model, contract length, and customer segment.

How to Calculate Retention in Your Own Business

You do not need a complex system to start. Many manufacturers initially track these metrics in a spreadsheet, alongside other financial management control processes.

A basic process looks like this:

1. Choose your period
   Most companies begin with an annual view, and then add quarterly or monthly tracking as they mature.

2. List all customers with recurring contracts at the start of the period
   Include their subscription value (ARR or MRR) and exclude new customers who will join later.

3. Track changes over the period
   For each customer, record:

   • Revenue that remains unchanged

   • Revenue lost due to partial or full churn

   • Any expansion from upgrades, more users, or add-ons

4. Sum across all customers

   • Total starting recurring revenue

   • Total revenue lost from that base

   • Total expansion revenue from that same base

5. Apply the formulas

   • Gross retention = (Starting – Lost) ÷ Starting

   • Net retention = (Starting – Lost + Expansion) ÷ Starting

Once these metrics are in place, they become part of the same reporting rhythm as your cost volume profit analysis, cash flow visibility reports, and manufacturing capital efficiency ratios.

How Retention Drives SaaS Growth More Than New Sales

When owners think about growth, the first instinct is usually to push for more new customers. New logos matter, but for SaaS, net retention often has more long-term impact than pure new sales volume.

Consider two simple scenarios.

Scenario 1: Strong new sales, weak retention

This business adds many new customers each year, but net retention is low:

• High acquisition cost

• Significant churn

• Frequent downgrades

The result is a “treadmill” effect. New sales are used just to replace lost revenue. Over time, the company spends heavily on sales and marketing without building a stable recurring base. This pressure often shows up as stress on cash flow solutions and more reliance on debt vs equity financing.

Scenario 2: Moderate new sales, strong retention

Here, new sales are steady but not spectacular. However, net retention consistently sits above 110%:

• Existing customers very rarely leave

• Many add more modules, locations, or users

• The revenue base grows even if new sales slow down for a quarter

Over several years, the second business often outperforms the first in both profitability and enterprise value. For manufacturers, this type of stability also supports smarter capital planning and better strategic capital allocation.

Improving Gross Retention: Keeping the Revenue You Have

If your gross retention is lower than you would like, the focus should be on reducing avoidable churn and downgrades.

Key levers include:

Strong onboarding and implementation

For plant managers and operators, software that is not properly implemented becomes “just another system.” A structured approach, similar to applying best practices for manufacturing accounting, helps:

• Clear training plans
• Defined success criteria
• Regular early check-ins

Clear link to operational and financial outcomes

Customers are more likely to stick with your SaaS product when they see it affect the metrics they already care about, such as:

• Downtime and throughput
• Labor efficiency and labor cost control
• Inventory carrying costs and scrap

Connecting your software results to their strategies for profit growth and standard costing makes cancellations less likely.

Proactive support and review

Rather than waiting for a cancellation notice, many successful SaaS-enabled manufacturers:

• Schedule regular account reviews
• Share simple reports tied to manufacturing KPIs and metrics
• Highlight underused features that could unlock extra value

This approach mirrors the mindset behind financial health checks for manufacturing companies, but applied to your SaaS offering.

Improving Net Retention: Growing Revenue Inside the Base

If gross retention is reasonable but net retention is weaker than you would like, the challenge is often a weak expansion strategy. Customers are staying but not growing.

You can improve net retention by designing a clear, value-based growth path.

Thoughtful packaging and tiers

Tiers that match maturity levels give customers a natural path to grow with you:

• A basic tier for monitoring and alerts
• A mid-tier that includes deeper analytics and reporting
• A top tier that integrates with ERP and supports forecasting

This aligns well with existing work you may already be doing around ERP system selection, manufacturing financial forecasting, and demand forecasting.

Value-driven add-ons

Expansion revenue grows more smoothly when add-ons are clearly tied to business outcomes, such as:

• Modules that improve cash flow visibility
• Features that help with cost control strategies
• Analytics that support capital efficiency

When customers can see the link between an add-on and their own profitability, upsells become a natural part of the relationship.

Pricing strategy grounded in data

Net retention metrics can also inform your broader pricing strategies and help you balance markup vs margin. By combining retention data with manufacturing KPIs, you can adjust your price structure without damaging customer trust.

How Your CFO Should Use Gross and Net Retention

Whether you have a full-time CFO or work with a fractional CFO who understands manufacturing, retention should be part of regular financial reviews.

A strong finance leader will:

• Integrate gross retention and net retention into your monthly reporting
• Connect them to your Profit and Loss Statement and top line vs bottom line
• Reflect them in your rolling forecasting and budgeting process
• Use them as inputs when evaluating capital investments and new feature development

Gross retention vs net retention is not just a SaaS dashboard conversation; it becomes part of how you plan growth, manage risk, and allocate resources across the entire manufacturing business.

Final Takeaway: Retention as a Core Growth Lever

Manufacturing owners stepping into SaaS or connected services often focus first on product features and new customer wins. Those matter, but over time, gross retention and net retention do more to shape your recurring revenue line than almost any single deal.

• Gross retention shows whether your business is holding on to the revenue it already has

• Net retention shows whether that same group of customers is growing with you

When you combine high gross retention, strong net retention, disciplined manufacturing finance strategies, and clear operational KPIs, your SaaS line becomes a stable, compounding engine of growth.

If you are serious about SaaS-driven manufacturing growth, do not stop at asking how many new customers you signed last quarter. Make sure you also understand:

• What your gross retention is

• What your net retention is

• And what specific steps you are taking to improve both over the next 12–24 months

That is how SaaS becomes more than a side product. It becomes a core driver of long-term manufacturing value.