One SaaS metric we monitor closely 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. Formulaically it’s beginning of period revenue + upgrades – downgrades – churn all divided by beginning of period revenue. If that 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, 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 and/or onboarding issue. Even though software is supposed to be easy, it’s not touchless and the customer will expect responsive and thorough customer service. Likewise, if you don’t onboard the customer properly, we’ve found that you’re almost guaranteed to lose them.
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 31 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 104.0%, 103.0%, and 102.0% for the 31 companies shown in the years leading up to the IPO. Note that the top 5, which includes names like Box and Okta, were much stronger showing average net retention of 132% in the IPO/S1 year. The top 10 were 124.5% and the top 20 were 115.5%.
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 ~120%+, you’re in great company.