One the most important metrics in SaaS is net dollar retention (“NDR”). It tells you what percent of revenue from current customers you retained from the prior year, after accounting for upgrades, downgrades, and churn. For SaaS businesses with annual or multi-year contracts, formulaically it’s beginning of period revenue + upgrades — downgrades — churn all divided by beginning of period revenue.
Similarly, you can also calculate NDR by starting with the ARR from all subscription customers as of 12 months prior to the current month (Prior Period ARR). Then calculate the ARR from these same subscription customers as of the current month (Current Period ARR). Divide the Current Period ARR by the Prior Period ARR to come up with net dollar retention. Similar to the formula above, this formula includes any expansion and is net of contraction or churn over the trailing 12 months but excludes revenue from new subscription customers in the current period.
If either formula yields a number greater than 100%, then growth from your existing customer base more than offset any losses from that customer base. Similarly, 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, the reasons could be myriad including poor product market fit, failure to identify the ideal customer, poor onboarding, weak customer success/support processes and touch, overly aggressive sales, etc.
So what’s a good level of net retention? Below we present the net dollar retention of 73 SaaS IPO’s at the time of going public.
On median the net dollar retention was a healthy 114% at the time of IPO. Note that the top 5, which includes names like Crowdstrike and Datadog, were much stronger showing average net retention of 151% prior to IPO. The top 10 had 145% NDR and the top 20 had 135%.
In summary, net retention is a critical figure: if you’re at 114% you’re in line with the average and median. If you’re below 100%, work to figure out what’s happening.
Visit us at blossomstreetventures.com and email us directly at firstname.lastname@example.org. All founders welcome! We invest in companies with run rate revenue of $2mm to $30mm, with year over year growth of 20% to 50%+ depending on revenue. We lead or follow in growth rounds and special situations like inside rounds, small rounds, rushed rounds, corralling investors with our term sheet, bridges, inbetweeners, cap table clean up, and founder secondary. We can commit in 3 weeks and our check is $1mm to $2mm. Email us!