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 based on our math, upsells may account for the bulk of SaaS revenue, especially in this environment.
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 were 15% to 30% of original revenue. 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 20% year over year, if that business net dollar retention of 110% and gross retention of 90%, then $2 out of every $5 of new revenue was an upsell. It’s material.
Hopefully the above drives home how important it is to upsell your current accounts, especially in this environment where new customers may be very hard to come by. Make sure your customer success reps are focused on retention only, while account executives are tasked with reaching out to current customers and driving upsells.
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