Net retention of 100% will help take you public

One SaaS metric we’re infatuated with is net retention.  In summary, it tells you what percent of revenue you retained from the prior year, after accounting for upgrades, downgrades, and churn.  Formulaiclly it’s beginning of period revenue + upgrades – downgrades – churn.   If that formula yields a number greater than beginning of period revenue, then you’ve got net retention in excess of 100%.  It’s where you want to be because it means the growth from your existing customer base more than offset any losses from that customer base. 

 

On the flip side, net retention below 100% means churn and downgrades were greater than any growth you enjoyed from the expansion of existing customers.  If that’s the case, you need to take action with Customer Success and Customer Support to try and reverse the trend (generally we find it’s not a product issue, but rather a customer success issue). 

 

So what’s a good level of net retention? To find out, we looked at publicly traded SaaS companies right when they went public so we could see the net retention at their IPO, but also in years prior when they were Series B and Series C companies.  Unfortunately not every SaaS company discloses this information, and indeed we found 16 companies that shared the data. 

 

The table below is organized so you can see the net retention of the each company in their IPO year and in the two years prior leading up to that IPO.  In summary, on median the net retention was 100%, 102%, and 100% for the 16 companies shown in the years leading up to the IPO.  Note that the top 5, which includes names like Box and Lifelock, were much stronger showing average net retention of 118%, 124%, and 123% respectively.  Obviously the top 5 is where you want to be. 

 

      NET RETENTION       YEARS  
      Prior IPO     Prior IPO
Name Ticker 2 Years Prior Year Year   2 Years Prior Year Year
2U TWOU 127% 157% 144%   2011 2012 2013
Box, Inc. BOX 129% 144% 136%   2011 2013 2014
Castlight Health, Inc.  CSLT 100% 103% 116%   2013 2014 2015
Marin Software, Inc. MRIN 123% 109% 114%   2010 2011 2012
Lifelock LOCK 109% 108% 105%   2009 2010 2011
Xactly XTLY 102% 102% 104%   2013 2014 2015
Shopify SHOP 99% 101% 101%   2012 2013 2014
Five9, Inc.  FIVN 102% 107% 100%   2011 2012 2013
Instructure INST 100% 100% 100%   2013 2014 2015
RingCentral, Inc. RNG 98% 99% 99%   2010 2011 2012
Secureworks SCWX 99% 102% 97%   2013 2014 2015
Cornerstone OnDemand, Inc. CSOD 90% 95% 96%   2008 2009 2010
Benefitfocus, Inc. BNFT 95% 95% 95%   2011 2012 2013
Medidata Solutions, Inc. (CUSTOMER RETENTION) MDSO 84% 82% 92%   2005 2006 2007
Bazaarvoice, Inc. BV 84% 88% 89%   2009 2010 2011
HubSpot, Inc. HUBS 72% 82% 83%   2011 2012 2013
                 
                 
MEDIAN   100% 102% 100%   2011 2012 2013
AVERAGE   101% 105% 104%        

 

 

Looking at more recent data (available through 2015), we see similar trends with median net retention in 2013, 2014, and 2015 of 100%, 102%, and 103%.  The top 5 in 2014 and 2015 had average net retention of 131% and 127% respectively. 

 

    2013 2014 2015
Name Ticker Retention Retention Retention
Veeva Systems Inc. VEEV --- 166% 136%
New Relic, Inc. NEWR --- 110% 130%
Box, Inc. BOX 144% 136% 126%
Zendesk, Inc. ZEN --- --- 123%
2U TWOU 144% 112% 120%
Castlight Health, Inc.  CSLT --- 103% 116%
Marketo, Inc. MKTO 100% 109% 105%
SecureWorks SCWX 99% 102% 105%
Xactly XTLY --- 102% 104%
Cvent, Inc.  CVT --- 102% 102%
Demandware, Inc. DWRE 100% 100% 100%
Instructure INST 100% 100% 100%
HubSpot, Inc. HUBS 83% 93% 99%
RingCentral, Inc. RNG --- 99% 99%
Five9, Inc.  FIVN 100% 96% 96%
Benefitfocus, Inc. BNFT 95% 95% 95%
Cornerstone OnDemand, Inc. CSOD 95% 95% 95%
Proofpoint, Inc. PFPT 90% 90% 90%
         
         
MEDIAN   100% 102% 103%
AVERAGE   105% 106% 108%

 

In summary, net retention is a critical figure: if you’re at 100% you’re in line with the average, if you’re below 100% do a little work to figure out what’s happening, and if you’re ~125%+, you’re in great company.           

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