Let's dive into another core SaaS metric: Net Dollar Retention (NDR), also known as Net Revenue Retention (NRR).
NDR measures the revenue retained from customers over a given period, accounting for churn factors like cancellations, downgrades, and pauses. It's crucial to select a cohort with a clear start date for the period you're measuring. Do not include customers who started after the cohort's start date. Common cohorts are a month, quarter, or year.
NDR is vital for VCs evaluating SaaS business models because it signals the product's inherent value. It shows that customers not only continue using the product but are also willing to spend more over time, likely because they are capturing significant value from the solution. NDR also speaks to the strength and predictability of the revenue, a topic I covered in my previous post on Monthly Recurring Revenue (MRR).
Here are different levers to improve your NDR:
Expand current product usage: Add seats/licenses to current clients.
Upsell new products: Sell additional products to current clients.
Reduce churn: Avoid account shrinkage and losing clients.
Formula for NDR:
Common Issues with NDR:
Cohort Consistency: Avoid including customers who were not part of the cohort at the start of the period.
Customer Segmentation: As your company grows, divide customers into segments. One large client or industry can skew your metrics, so track each segment to identify issues.
Headcount Dependency: Relying on headcount expansion to improve NDR is risky.
High NDR: An exceptionally high NDR (above 130-140%) may indicate you're leaving money on the table rather than creating a sticky value proposition.
What is a Good NDR?
While researching, I found the Blossom Street SaaS Metrics tracker, which follows data from publicly traded SaaS companies in the US—a great benchmarking resource. For Q1 2024, the median NDR in their sample is 112%, and the average is 110%. The highest reported quarterly median was 125% (Q2 2022), and the highest average was 122% (Q1 & Q2 2022). Top NDR performers for Q1 2024 include GitLab (129%), Snowflake (128%), Confluent (120%), and Olo (120%).
While it's not ideal to benchmark startup metrics with public companies, it provides a long-term perspective.
Further, in a recent episode of the BG2Pod (highly recommend), Aaron Levie, CEO of Box, highlighted the importance of NDR:
“Incredibly important (metric), you can make any business model work if it’s 90 or 100 or 110% … in our best years… hyper-growth period, we were 130, 140, 150%, that comes down at some point”
Significant deviations from these benchmarks are rare. If your NDR is 200-300%, investigate thoroughly. However, note that public companies can sometimes be creative in reporting NDR, so consider these proxies cautiously.