Sammy is the Managing Director and Cofounder of Blossom Street Ventures. Connect on LinkedIn or email him directly at email@example.com, especially founders at all stages.
Net dollar retention is the most important measure in SaaS. Formulaically, it’s ARR + upgrades — downgrades — churn all divided by 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 59 SaaS companies which disclosed their net dollar retention at IPO. The data is below and shows on median, the net dollar retention was 111% while the top performers are well above 120% (top 5 averaged 151%).
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 111% 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, 13 of the companies above had net dollar retention below 100% and still managed to go public.