This presentation discusses net dollar retention (NDR), aka dollar-based net retention and/or net revenue retention rate (NRR), for SaaS companies first discussing prior-generation metrics (e.g., churn, LTV), the rise of NDR, why NDR matters to both the company and the Customer Success team, and then looks at "what good looks like" in terms of an NDR rate. Spoiler: median is 104% for pre-public and 111% for public, roughly.

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All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License.
Net Dollar Retention (NDR)
Key Benchmarks at $50M, $200M, $1B ARR
Dave Kellogg, Principal
Dave Kellogg Consulting
www.kellblog.com | @kellblog
6/11/21
Revision 1.7
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Biography and Shameless Social Media Plugs
• CMO 10+ years
• 2.2 companies
• From $5M to $1B
• CEO 10+ years
• 2 companies
• From $0 to $80M
• Independent director 10+ years
• 7 companies
• 3 great exits; 4 in progress
Slide 2
Thursdays
8:00 AM Pacific
on Clubhouse

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The Answer Is
104%
Slide 3

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Agenda
• How did NDR become the metric of choice?
• Why NDR matters?
• What does good look like?
Slide 4

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How Did NDR Become The
Metric of Choice?
Slide 5

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In the Beginning There was Churn and LTV
• Leaky bucket metaphor
• Sales pours ARR in; CS prevents leakage out
• Churn rate = amount leaked / amount in bucket
• Simple concept brought subtle ambiguity
• Leaked before or after expansion (gross vs. net)
• Total in bucket or up for renewal (ARR vs. ATR)
• And polluted downstream metrics
• Customer lifetime (CLT) = 1 / churn rate
• 4 possible churn rates meant 4 CLTs
• Lifetime value (LTV) dependent on CLT
• LTV/CAC ratio dependent on LTV
Slide 6
“Other than an ambiguous numerator and denominator, LTV/CAC is a fine ratio.”

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The Laundry List of Problems with Churn and LTV Metrics
• Multi-year deals brought the concept of available to renew (ATR)
• 4 different churn rates  4 different customer lifetimes (CLT)  downstream metrics pollution
• Heavily forward-weighted and/or infinite lifetimes due low or negative churn rates
• 20-year CLT at 3-year-old company
• Timing issues
• 100 units expands to 120 and renews at 105: 5 units of expansion or 15 of churn?
• LTV analysis assumes annuity payment stream (LTV = CLT * ARR)
• Contracts typically expand through inflation indexing, additional seats, price increases, edition upgrades, new products,
and increasingly, consumption or usage fees
• Typically not disclosed by public companies
• Subject to gaming
• $1 renewals to preserve count-based renewal metrics
• Excluding churn from customers below some size floor
• Survivor bias by excluding discontinuing customers
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“ARR is a fact.
LTV is an opinion.”
(As was once said about cash versus profit)
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Why NDR is a Better Metric for Installed Base Value
• Less ambiguous
• No four-churn-rates problem, no downstream metrics pollution, no timing issues
• Harder to game
• Though survivor bias and arbitrary floors are still possible
• Math doesn’t break under desired scenarios
• Negative churn is good and should not break the model
• More empirical
• Look at what’s happening rather than projecting into the future
• Built for the reality that SaaS contracts aren’t annuities (i.e., steams of equal payments)
• We want (and increasingly build in) expansion
• Public companies more willing to disclose NDR than churn
• The vast majority do
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What’s in a Name?
(NDR is also known as dollar-based net retention)
Net = after netting expansion and
shrinkage
Gross dollar retention = before offsetting shrinkage
with expansion
Dollar = using contract size in ARR
dollars, not customer logo counts
Begs pesky issues with currencies
Retention = % of starting ARR retained
Now divided-by then for year-ago customer cohort
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Why NDR Matters?
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NDR is a Key Company Valuation Driver
Slide 12
Source: Meritech Public Comps – see references slide

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NDR has the Highest Explanatory Power of Enterprise-
Value-to-Revenue Multiple (EV/R)
Slide 13
Source: Meritech Public Comps – see references slide (as of 6/9/21)
Metric
R^2 to
EV/NTM Revenue Multiple
NDR 0.40
NTM Revenue Growth 0.37
Implied ARR Growth 0.29
CAC Payback Period 0.17
Rule of 40 0.15
Magic Number 0.08
Gross Margin 0.00

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NDR Buys Customer Success a Seat at the Table
• NDR is becoming the leading SaaS metric
• Customer Success is widely viewed as owning all or part of NDR
• Expansion doesn’t happen without successful onboarding and consistent attainment of business objectives
• Typically either identifies, supports, or sells expansion opportunities
• Customer Success people are often “nice” by background (cf: salespeople)
• Sometimes feel like they don’t have a seat at the table despite carrying big numbers
• Often reluctant to pressure the organization to deliver what they need for success
• Thanks to NDR focus, Customer Success has not just the right but the obligation
• To identify key dependencies for its success
• To hold the organization accountable for delivering
• Watch how Sales does this; they’re usually pretty good at it
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What Does Good Look Like?
Slide 15

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RevOps2 B2B Benchmarks Report
Slide 16
Source: RevOps Squared, pre-release report https://www.revopssquared.com/
Breaking

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My Swag at Benchmarking NDR
Stage Minimal Good Very Good Snowflake
Early (~$10M) 90% 100% 110%
Growth (~$50M) 95% 105% 115%
Approaching IPO (~$200M) 100% 110% 120%
Public (~$1B) 100% 110% 120% 168%
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Disclaimers
• Not scientific; back-of-the-envelope estimates based on reviewing various surveys
• Minimal = investors likely to raise eyebrows – “we have questions about your NDR”
• Good = investors likely to think it’s in their desired range – “your NDR looks in-line”
• Very good = investors will tell portfolio companies to be like you – “I think typical is …”
See Appendix for various sources and references

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Applying the NDR Benchmarks
• Function of stage
• Early days often more about “land” than “expand”
• Function of expansion model
• Seats, editions, products, consumption
• Function of business model
• Workday 100% – big deals, upfront, long-term
• Function of target market
• HubSpot 102% – need to offset presumably high SMB churn
• Function of sales motion
• Slack 123% – freemium, land-and-expand motion
• Function of pricing model
• Twilio 133% and Snowflake 168% -- usage/consumption-based pricing
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OpenView
NDR Analysis
by Pricing
Model
Slide 19
Source: OpenView Expansion SaaS Benchmarks

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Thinking About Consumption-Based Models
Slide 20
Sound
familiar?
Source: https://openviewpartners.com/blog/usage-based-pricing-2-0

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Conclusions • Churn and LTV had a good run
• But the world is increasingly focused on NDR
• NDR explains valuation more than either forward revenue
growth or Rule of 40 score
• NDR buys Customer Success a seat at the table; use it to
hold the organization accountable for delivering for CS
• While NDR varies with expansion model, sales motion, and
other factors, it’s remarkably consistent across size
• Remember one number: 104% (median)
• 7 of the top 9 NDR rate public companies have a usage-
based (aka, consumption-based) model
• Usage will be nearly as transformational as was SaaS itself
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Appendix
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UiPath S-1 Excerpt
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OpenView NDR Pie Chart
Slide 24
Source: OpenView Expansion SaaS Benchmarks

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OpenView NDR by Target Customer Type
Slide 25
Source: OpenView Expansion SaaS Benchmarks

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Meritech Public Comps Table Excerpt
Slide 26
Source: Meritech Public Comps

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JMP NDR Bar Chart (Coverage Universe)
Slide 27
Source: JMP Securities

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JMP GDR (Gross) Bar Chart (Coverage Universe)
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Source: JMP Securities

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RevOps2 Gross (GDR) Rates
Slide 29

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KeyBanc Gross Churn by Company Size
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WalkMe S-1 Highlighting NDR in Size Segment
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Source: https://www.meritechcapital.com/blog/walkme-ipo-s-1-breakdown

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Snowflake Metrics from Public Comps
Slide 32
Source: https://publiccomps.com/

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Bessemer Usage-Based Premium
Slide 33
Source: https://www.bvp.com/atlas/state-of-the-cloud-2021

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Insight Case for Usage-Based Pricing
Slide 34
Source: https://www.insightpartners.com/blog/how-usage-based-pricing-fueled-two-2020-ipos/

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Insight Usage-Based != Pay As You Go
Slide 35
Source: https://www.insightpartners.com/blog/how-usage-based-pricing-fueled-two-2020-ipos/

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Snowflake S-1 Net Revenue Retention Rate
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Source: https://www.sec.gov/Archives/edgar/data/1640147/000162828020013010/snowflakes-1.htm/
Trailing
Capacity
contracts
Cohort No survivor
bias? Various
adjustments
and perhaps
exclusions
Unclear,
includes custs
not in cohort?

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Twilio Dollar-Based Net Expansion Rate
Slide 37
Survivor bias?
Floor, trial
exclusion
Need to
aggregate
For those with
minimums
End of
exclusion
Not survivor-
biased? Trailing?
Cohort based?

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References / Further Reading
• https://www.revopssquared.com/
• https://www.meritechcapital.com/public-comparables/enterprise#/public-comparables/enterprise/valuation-metrics
• https://www.key.com/kco/images/2020_KBCM_SaaS_Survey_8102020.pdf
• https://publiccomps.com/tickers?items=High+Growth+SaaS
• https://openviewpartners.com/blog/usage-based-pricing-2-0/
• https://kellblog.com/2020/09/02/churn-is-dead-long-live-net-dollar-retention-slides-from-my-saastr-2020-presentation/
• https://kellblog.com/2014/07/26/you-cant-analyze-churn-by-analyzing-churn/
• https://kellblog.com/2014/07/30/the-ultimate-saas-metric-ltv-cac/
• https://kellblog.com/2015/04/27/survivor-bias-in-churn-calculations-say-its-not-so/
• https://www.saastr.com/what-are-some-tricks-software-companies-can-use-to-manipulate-churn-metrics/
• https://www.investopedia.com/terms/c/constantcurrencies.asp
• https://www.investopedia.com/terms/r/r-squared.asp
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