What is Underlying Retention? Why It Matters for Aussie Businesses in 2025

Customer retention metrics are evolving, and in 2025, ‘underlying retention’ is taking centre stage for Australian businesses. As competition heats up and recurring revenue models dominate, understanding this metric can be the difference between thriving and barely surviving.

What Is Underlying Retention?

Underlying retention measures the percentage of existing customers or revenue a business keeps over a set period, after stripping out the impact of expansion (upsells), contraction (downgrades), and new business. Unlike traditional retention or churn rates, this metric provides a clear view of true customer loyalty and baseline revenue stability.

• Customer underlying retention tracks the proportion of original customers who remain, ignoring any upgrades or downgrades in their plans.
• Revenue underlying retention focuses on recurring revenue from existing customers, excluding changes due to upselling or cross-selling.

For example, if your business started 2025 with 1,000 subscribers and 920 remained by June (ignoring upgrades or downgrades), your underlying retention rate would be 92%. This is different from net revenue retention, which could be higher if some customers upgraded their plans.

Why Underlying Retention Matters in 2025

Australian businesses are facing tighter margins, increased customer acquisition costs, and greater scrutiny from investors. In this climate, underlying retention offers several key advantages:

• Clarity for Investors: With ASX-listed companies and private firms alike being pushed for more transparent reporting, underlying retention removes the noise of short-term revenue spikes from upsells or expansions. Investors see how well a company truly holds onto its core customer base.
• Early Warning System: A declining underlying retention rate can signal brewing customer dissatisfaction—long before revenue numbers start to fall. This early alert lets businesses act before churn becomes a crisis.
• Accurate Forecasting: In 2025, financial forecasting relies on recurring revenue stability. Underlying retention is now central to revenue models, especially for SaaS, fintech, and subscription-based Aussie businesses.

Recent policy updates by the Australian Securities and Investments Commission (ASIC) in late 2024 now encourage greater disclosure of underlying retention in annual reports, reflecting this trend toward deeper transparency in financial reporting.

How to Calculate and Improve Underlying Retention

Calculating underlying retention is straightforward but requires accurate cohort tracking:

1. Choose a cohort (e.g., all customers active on 1 January 2025).
2. Track how many of these specific customers remain at the end of your chosen period (e.g., 30 June 2025), regardless of whether they upgraded, downgraded, or maintained their plan.
3. Exclude any new customers added during the period and ignore revenue expansion/contraction from existing customers.
4. Formula: Underlying Retention (%) = (Number of Cohort Customers Remaining / Original Cohort Size) x 100

To improve underlying retention, focus on:

• Customer Experience: Proactive support, easy onboarding, and regular value check-ins keep customers satisfied.
• Feedback Loops: Use exit surveys and Net Promoter Scores (NPS) to identify and address churn drivers early.
• Contract Flexibility: With more Aussies expecting month-to-month flexibility, rigid contracts can drive higher churn.
• Personalisation: Tailor communications and offers to individual customer needs, especially in fintech and SaaS sectors.

Some of Australia’s fastest-growing fintechs—like Afterpay and Xero—now publicly report underlying retention rates in their investor presentations, highlighting its growing importance in the 2025 reporting landscape.

Real-World Example: Underlying Retention in Action

Consider an Australian cloud software provider with the following 2025 data:

• Start of year: 2,000 business customers
• End of year: 1,850 of the original customers remain (150 churned), 500 new customers added
• Some customers upgraded, but that revenue is not counted for underlying retention

The underlying retention rate is (1,850 / 2,000) x 100 = 92.5%. This is a more honest assessment of customer stickiness than a net revenue retention rate that might exceed 100% due to upgrades.

Investors, lenders, and business partners increasingly expect to see this metric in due diligence and annual reporting.

Looking Ahead: Why It’s Essential for 2025 and Beyond

With economic uncertainty still lingering and a competitive market for subscription services, underlying retention will continue to be a core KPI for Australian businesses. Those who measure, report, and act on this metric will be better placed to build sustainable growth, attract investment, and weather future market shocks.