Are You Overlooking Key Retention Metrics?
What does the benchmark comparison of SaaS Customer, Gross Dollar and Net Dollar Retention tell you about your business – and where is it heading?
Net Dollar Retention (NDR or NRR if contracts aren’t dollar based) measures the growth in contract values for a given period, net of churn, contractions, renewals and expansion. NDR/NRR is a highly valued and analyzed KPI by investors and management teams, especially as there seems to be an implicit assumption that past NDR/NRR performance is indicative of future results. It is our experience that NDR/NRR, on its own, is a lagging indicator, but when coupled with two other retention rates, Customer retention and Gross Dollar retention, the three together become better indicators of future results.
Net Dollar Retention
NRR captures revenue churn, offset by increased revenue from existing customers through up-sells, cross-sells, price increases, or increased usage. The term “net” is used because lost revenue is “netted” against expansion revenue. The measurement is based on contract values.
Customer Retention
Customer Retention measures the percentage of unique customers that are retained over a specific period of time. The measurement is based on numbers.
Gross Dollar Retention
Gross Dollar Retention is measured as the percentage of contract value retained or renewed from an original cohort of customers, and captures contract down-sells or contractions and excludes any contract expansion. The measurement is based on contract values.
Definitions Source: the SaaS Metrics Board: https://www.saasmetricsboard.com/standards
Does NDR/NRR Tell the Whole Story?
For the past few years, SaaS industry bloggers, analysts and thus some investors and boards have been pushing the primary importance of NDR/NRR.
Most subscription vendors have over 100% NDR/NRR and the level is higher for companies selling into the enterprise (110%+) versus companies selling into SMB customers where churn is higher and the opportunity for expansion is more limited.
NDR/NRR can hide a variety of growing problems in subscription sales, most notably increasing customer churn, inefficient sales to customers not likely to renew and contract reductions among existing customers. With greater focus currently on efficient growth, many SaaS companies are taking a closer look at all three retention KPIs.
Here’s a few examples that have come up in our benchmarking work recently:
Case Study 1: An average NDR obscures retention problems
Background:
- A $300M SaaS company, selling medium to larger contracts in the enterprise, focuses primarily on NDR/NRR; it is the only retention metric in Board and Investor reporting.
- Average Contract Value (ACV) for sales is $75k
- In 2024, the company’s NDR/NRR is projected to finish the year at 105%, down from 115% in 2021 but not far off broad industry NDR/NRR averages of 107% in 2024.
- However, the company’s Customer Retention rate has fallen from 90% a few years ago to 85%, and
- Gross Dollar Retention rate (GDR) of 77% is lower than the Customer Retention rate.
Benchmarking Findings:
Benchmarking this company against peers with a similar sales motion and growth rate, we found:
- NDR benchmark for peer companies was 5 points higher and top quartile companies (with a higher growth rate) were 8 points higher,
- GDR benchmark for peer companies was 10 points higher
Conclusions:
Customer retention higher than GDR indicates customer contract reductions or contractions.
A growing GDR and Customer retention problem was masked by NDR/NRR, which is also slowing, but not yet at a rate to set off alarms. Customer churn and contract reductions (indicated by GDR lower than Customer Retention) means that there are fewer customers to upsell, dragging down on NDR and future growth. NDR may continue to decrease.
Benchmarking retention rates is the first level of identifying opportunities to improve growth and profitability going forward. To diagnose this problem further, the company should look to Customer Acquisition Cost (CAC) for their size and type of contract. If CAC is higher than benchmark (as we found in this case) the impact of churning 15% of customers on profitability is high. The company needs to look at what type of customers are being sold and whether Sales and Marketing is targeting customers who are likely to renew.
Further, we looked at R&D resource allocations, and found overinvestment in new product features and weaknesses in technical support that may be contributing to customer churn.
Case Study 2: Strong GDR Indicates Focus on Profitable Customers
Background:
- A $75M SaaS company selling in both the SMB and enterprise markets, average contract value (ACV) of $35k
- Strong 25% year-over-year growth
- In 2024, the company’s NRR is projected to be 101%, down slightly from 103% in 2023
- The company’s Customer Retention rate has fallen from 87% in 2023 to 80% in 2024
- The company is projecting a 2024 GDR of 92%, up from 82% previously.
Benchmark Findings:
- Company NDR/NRR is at the median benchmark level for peer companies selling similar contract values but 4 points below top quartile.
- Customer retention is 8 points off the benchmark, and
- GDR is 7 points above the peer benchmark
Conclusions:
Higher GDR than Customer Retention likely indicates a loss of small contract customers and retention of higher contract customers.
GDR above the customer retention rate usually indicates that a company is losing small contract customers, and retaining higher contract customers. This can be an intentional strategy to focus on more profitable customers. The company may be tightening its ICP, and sales and marketing efforts to make its growth more efficient, and achieve top quartile NDR/NRR, which is important for valuations.
We found the company to be very data-driven with strong sales productivity. Assuming that the low customer retention rate is an intentional byproduct of transitioning to larger and more profitable contracts, the company is poised to see higher Customer and NDR/NRR rates next year.
The Full Picture: Retention and Future Growth
Tracking only NDR/NRR can mask customer churn, inefficient use of sales resources in selling unprofitable customers, and future growth problems. It is critical to track all three retention KPIs: NDR/NRR, Customer retention and Gross Dollar Retention to understand GTM efficiency and future growth opportunity.
Just like with incentive plans, especially sales commissions, over-indexing on one metric can have unintended consequences to the detriment of other KPIs that ultimately bring down total performance.
Benchmarking against peer cohorts with similar sales motions is highly valuable to understand if your company is efficiently retaining and upselling customers and contracts. Many companies have been changing GTM motions to better align with changing customer requirements in 2024. Benchmarking across GTM, product and R&D can ensure that resource allocations across the company are coordinated to most effectively achieve growth goals.
