For SaaS companies, net dollar retention is on investor radar more than ever. But it shouldn’t eclipse gross dollar retention: If you are not tracking both metrics, you could be fighting to add new customers into a leaky bucket. Let’s explore. — Anna
Gross dollar retention is “what protects you during really challenging times”
“Gross retention really speaks to the true stickiness and health of your customer base. It’s what protects you during really challenging times,” growth stage VC Rene Stewart said in a sponsored talk at TechCrunch Disrupt in 2021.
And yet, the co-head of Vista Equity Partners’ growth-stage Endeavor Fund added, most VCs she talked to “probably only care about net retention.” However, her comments were made in 2021, not 2022. “Challenging times” have come upon us since then, making investors and founders more mindful of business fundamentals.
Alex and I have already written about the importance of net dollar retention when efficient growth is the new holy grail. But how does it differ from gross dollar retention, and how has the latter been faring at most tech companies? Let’s dive in.
GDR and NDR
The recent OpenView-Chargebee SaaS benchmarks report gives the following definitions of GDR and NDR:
- Gross dollar retention (GDR): Annual gross dollar retention (after churn, exclusive of upsells and expansion).
- Net dollar retention (NDR): Annual net dollar retention (after churn, inclusive of upsells and expansion).
If these definitions sound a bit abstract, let’s use metaphors: Using a sports analogy, Stewart compared NDR to offense and GDR to defense. “It’s pretty critical to be able to track and know both once your company has started to scale,” she said.
What does a healthy GDR look like at a company that has scaled? In its State of the Open Cloud 2022 report, VC firm Battery Ventures argued that software companies should have a 90% GDR as one of their long-term operating targets (alongside a 130% NDR).
We have at least another data point that seems to validate Battery’s 90% target: As we noted recently, publicly listed software company Appian “is proud of the fact that its gross retention is 99%.” But how does that metric look for younger companies, and how is it trending?
Keeping your customers
OpenView’s SaaS survey found out that “early-stage companies [in the $2.5 million to $10 million annual recurring revenue range] are seeing gross retention come down relative to 2021.” In contrast, respondents from companies with ARR above $10 million reported GDR percentages that were either level or superior to 2021’s survey sample.
What can early-stage companies do to emulate the GDR of their later-stage peers, then? Well, since upsells and expansion aren’t part of the equation, what’s left is fighting churn. OpenView featured some advice on the topic from its report partner Chargebee:
- Set churn as a company KPI: Businesses with a shared company-wide KPI for churn see improvements vs. those with differing departmental KPIs for retention.
- Personalization goes a long way: 72% of consumers only want to engage with personalized messaging — as you scale, find ways to create personalized experiences.
- ID the customers you can save: 15%–30% of churn can be resolved in the moment of cancellation. For small company sizes, test reactive discounting or help materials during cancellation.
Of course, there’s only so much you can do for your company to retain customers in a recession. But if there’s low-hanging fruit like retaining customers with a personalized message or discount, you may want to go for it. The good news is that there is an emerging range of tools to help achieve this on mobile and beyond, which is another trend that we will keep on monitoring in 2023.