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 98 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 Gitlab and Snowflake, were much stronger showing average net retention of 163% prior to IPO. The top 10 had 153% NDR and the top 20 had 142%.
In summary, net retention is a critical figure: if you’re at 114% you’re in line with the median. If you’re below 100%, work to figure out what’s happening.