Net dollar retention is the most important measure in SaaS. Formulaically when measured over a 12 month period, it’s ARR 12 months ago + upgrades — downgrades — churn that occurred over the following 12 months, all divided by that beginning ARR. A healthy SaaS business has net dollar retention over 100% because upgrades in the customer base are outpacing churn and downgrades. There are 91 SaaS companies which disclosed their net dollar retention at IPO. The data is below and shows on median, the net dollar retention was 114% while the top performers are well above 120% (top 5 averaged 163%).
A few observations stand out.
Focus on the customers that matter. You shouldnt care so much about losing customers that weren’t a good fit (every SaaS company is guilty of signing up customers they shouldn’t have), whereas you should obsess over customers you lost that are a good fit. So long as your target customer base is upgrading more than they’re downgrading and churning, you’ve got a great SaaS business. Spend less time worrying about customers you lose that probably should never have signed up.
Creating real value means driving upgrades. The difference between 90% gross dollar retention and 95% gross dollar retention is meaningful, but not huge. However, the difference between 99% net dollar retention and 147% net dollar retention is massive. The lesson is keeping customers is important, but not as important as keeping and upgrading your target customers. One of the biggest drivers of value in SaaS is showing that you’re not only keeping the customer base, but they’re also a source of new revenue driving growth in the business. The chart below of Crowdstrike’s net dollar retention versus their gross dollar retention shows it’s much easier to drive net dollar retention with upgrades than push up already high gross dollar retention with less churn.
Net dollar retention needs to be above 100%. SaaS is a beautiful business model when net dollar retention is 100% or higher. It means you’re effectively keeping the customer for life. The median net dollar retention of the companies above is 114% so that should be your target, but generally speaking so long as you’re over 100%, you’re in good company. As you can see, 16 of the companies above had net dollar retention below 100% and still managed to go public.
Visit us at blossomstreetventures.com and email me directly at firstname.lastname@example.org. All founders and funds 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, extensions, and founder secondary. We can commit in 3 weeks and our check is $1mm to $2mm. Email us!