Sammy is the Managing Director and Cofounder of Blossom Street Ventures. Email him directly at firstname.lastname@example.org, especially founders.
Net dollar retention is the most important metric in SaaS. If you’re over 100%, revenue from upsells is outpacing revenue you’re losing from downgrades and churn. It means you’re keeping the customer base forever, and your current customers are a major source of growth. The latter is a wonderful bonus that isn’t well understood and may account for a significant portion of new revenue growth.
For clarity, net dollar retention is beginning of period revenue + upsells -churn — downgrades all divided by beginning of period revenue (BEGINNING + UPGRADES — CHURN — DOWNGRADES / BEGINNING). The most common measure of a period is 1 year. As the data shows, when most SaaS companies go public, their net dollar retention is 111%.
How can upsells make up a material level of new revenue for many SaaS companies? While net dollar retention may be 111% on median, gross retention (BEGINNING — CHURN — DOWNGRADES / BEGINNING) is typically between 80% and 95% for most SaaS companies. In other words, companies are losing 5% to 20% of their revenue from current customers, so if net dollar retention is 111%, that means upsells weren’t just 11% of last year’s revenue, they were 16% to 31% (5+11 and 20+11). The table below illustrates the math and shows that in most cases upsells are very material to new revenue.
If a SaaS business is growing 50% year over year (median for SaaS IPOs is 48%), if that business net dollar retention of 111% and gross retention of 87%, then 48% of new revenue was an upsell. It’s material. Hopefully the above drives home how important it is to upsell your current accounts.