The Truth About Sticky Revenue
Many founders believe their revenue is sticky. Customers seem loyal. Switching costs appear high. The competition cannot match the value proposition. These assertions feel true in the day-to-day experience of running a business, where customer relationships are personal and product advantages seem obvious.
Then a sale process begins, and the acquirer applies a different lens. They are not interested in how sticky revenue feels. They want to know how sticky it actually is, measured in cohort behaviour, retention rates, and expansion patterns over time. The gap between perception and reality is often wider than founders expect.
For founders building businesses in the $1M to $4M ARR range, understanding what stickiness truly means, and how acquirers will test your claims, is essential preparation for any exit conversation.
Defining Stickiness Precisely
Stickiness is not a single metric. It manifests across multiple dimensions, each measuring a different aspect of customer commitment.
Gross Revenue Retention (GRR)
GRR measures the foundation: how much revenue you retain from existing customers before accounting for any expansion. The formula is:
GRR = (Starting ARR - Churn - Contraction) / Starting ARR
GRR cannot exceed 100%. It tells you what happens to your revenue base if you stop selling entirely and simply maintain existing relationships. SaaS Capital's 2025 benchmarks show median GRR for bootstrapped companies at 92%, with top performers achieving 98%.
GRR below 85% is a warning signal regardless of segment. It suggests that a meaningful portion of your customer base does not find lasting value in your product, that alternatives are readily available, or that your price-to-value relationship is unstable.
Net Revenue Retention (NRR)
NRR captures the complete picture by adding expansion to the equation:
NRR = (Starting ARR + Expansion - Churn - Contraction) / Starting ARR
NRR above 100% means your existing customers are growing faster than they are churning. Software Equity Group data reveals the valuation impact: companies with NRR above 120% trade at 9.3x revenue median, compared to 3.1x for companies below 100%. That is a 200% premium for the same topline growth.
The gap between GRR and NRR tells its own story. A company with 85% GRR and 115% NRR is compensating for significant churn through aggressive expansion. A company with 95% GRR and 105% NRR has a more stable foundation but less expansion opportunity. Acquirers will form different views about the sustainability and scalability of each model.
Logo Retention
Revenue retention can mask logo dynamics. If your logo retention is 80% but your revenue retention is 95%, you are losing many small customers while retaining large ones. This is not necessarily problematic, it may indicate successful movement upmarket, but it creates concentration risk that acquirers will examine.
Conversely, if logo retention is 95% but revenue retention is 85%, your largest customers are leaving while smaller ones stay. This pattern suggests the product may not scale well or that competitors are winning your most valuable accounts.
What Acquirers Actually Test
Acquirers do not accept reported retention metrics at face value. They will reconstruct the numbers from raw data and look for patterns that either validate or undermine your narrative.
Cohort Behaviour
The most revealing analysis segments customers by when they were acquired and tracks their behaviour over time. Acquirers look for the "smiling curve": retention that may dip initially as some customers fail to adopt, then stabilises and eventually curves upward as expansion kicks in.
If cohorts consistently decay, each vintage smaller a year later than it started, the revenue has a shelf life. No matter how strong current retention appears in aggregate, the trajectory tells acquirers that customers eventually leave.
If cohorts grow or stabilise, the opposite is true. Customer relationships compound over time. The business builds a durable foundation rather than running on a treadmill.
Churn Reason Analysis
Not all churn is equal. Acquirers will want to understand why customers leave and whether those reasons are addressable.
Involuntary churn includes business closures, acquisitions, and payment failures. These are largely outside your control and often acceptable at reasonable levels.
Competitive churn indicates a market challenge. Customers are leaving because alternatives offer better value. This is concerning because it suggests the trend may accelerate.
Value realisation churn indicates a product or onboarding challenge. Customers are leaving because they never achieved the outcomes they expected. This is addressable but requires investment.
A company with 10% annual churn is viewed very differently if that churn is split evenly across categories versus concentrated in competitive losses. The former suggests normal market friction. The latter suggests an existential threat.
Contract Structure
The structure of customer commitments matters. Month-to-month customers can leave with minimal friction, making retention metrics more impressive but also more fragile. Annual contract customers have made a commitment that provides predictability.
Acquirers will examine renewal timing and upcoming concentration. If 40% of your ARR comes up for renewal in Q1 and a major competitor just launched, the risk profile is very different than if renewals are evenly distributed and competitive threats are distant.
The Stickiness Illusion
Some forms of apparent stickiness are less durable than they appear.
Contractual Lock-in Without Value
Multi-year contracts create stickiness, but if customers are counting the days until they can exit, the relationship is a liability. The contract prevents immediate churn but guarantees future churn, often with vocal dissatisfaction that damages your market reputation.
Acquirers will look for signals of trapped customers: declining usage, support complaints, early renewal conversations that go nowhere. A contract that binds an unhappy customer is not the same as a product that genuinely retains.
Key Person Dependency
In smaller companies, retention often depends on relationships between founders and customers. The founder knows every customer personally, resolves issues quickly, and maintains loyalty through direct engagement.
This is not sustainable stickiness. It is founder dependency. An acquirer cannot buy the founder's personal relationships. If retention depends on those relationships, it will deteriorate post-acquisition, and acquirers will price that risk.
Switching Cost Confusion
Founders often cite switching costs as a retention driver without examining whether those costs actually bind customers. Data migration is painful, but if a customer is sufficiently motivated, they will absorb the pain. Integration complexity creates friction, but if your product is no longer delivering value, customers will re-integrate elsewhere.
True switching costs are those that would require a customer to sacrifice something valuable: years of accumulated data that loses context upon export, workflows that would need complete reconstruction, or institutional knowledge embedded in your system that cannot be replicated.
Assess honestly whether your switching costs are genuine barriers or merely friction that motivated customers will overcome.
Building Genuine Stickiness
The companies with truly sticky revenue share common characteristics that go beyond contractual constraints.
System of Record Status
Products that serve as the system of record for critical business functions achieve stickiness that is difficult to displace. The customer's historical data, institutional knowledge, and operational processes all flow through the platform.
SEG research shows DevOps and IT Management software achieving 119% NRR, the highest of any category, because these tools become infrastructure. Replacing them requires not just adopting a new tool but rewiring operational processes.
Multi-Stakeholder Adoption
When multiple people across multiple departments use your product daily, departure requires organisational consensus rather than individual decision. The sales rep who signed the contract may leave, but if twenty colleagues depend on the tool, continuity has built-in advocates.
Product roadmaps should consider adoption breadth alongside feature depth. A tool used deeply by one user is vulnerable. A tool used broadly across an organisation is embedded.
Compounding Value
Products that become more valuable over time create stickiness that grows rather than degrades. Machine learning models that improve with usage. Analytics platforms that provide longitudinal insights. Workflows that become more efficient as they are refined.
If your product delivers the same value in month 36 as month one, customers may eventually seek alternatives. If it delivers incrementally more value each month, departure means sacrificing accumulated gains.
Preparing Your Stickiness Story
Before entering any sale process, founders should pressure-test their retention narrative with the rigour that acquirers will apply.
Build cohort analyses from raw data. Understand not just your aggregate metrics but how different customer segments behave over time. Identify where stickiness is strongest and where it is weakest.
Categorise your churn. Know why customers leave and what proportion of churn is addressable versus structural. Be prepared to explain trends and initiatives.
Examine your switching costs honestly. Are they genuine barriers or convenient assumptions? What would a motivated customer need to do to leave, and have any actually done so?
Assess key person dependency. Would retention survive if the founder stepped back? What institutional capabilities support customer relationships beyond individual relationships?
The goal is not to manufacture a positive story but to understand the truth before acquirers do. A founder who can articulate retention dynamics with nuance and data builds credibility. A founder who claims stickiness that data contradicts loses it.
The Retention Premium
Sticky revenue commands premium valuations because it reduces acquirer risk. The cash flows are more predictable. The growth is more sustainable. The platform is more scalable.
For founders in the lower middle market, the difference between 90% and 98% GRR, between 105% and 120% NRR, can represent substantial variation in enterprise value on the same revenue base. The work of building genuine stickiness, through product capability, workflow integration, and value compounding, pays returns not just in operational efficiency but in the multiple applied at exit.
Understanding what stickiness really means, and building it deliberately, is among the highest-leverage activities for founders preparing for a transaction.
If you are evaluating your retention metrics and want an outside perspective on how acquirers might view them, we are glad to discuss.