MRR beasts, and where to find them; how tracking net dollar retention helps top SaaS companies
Most people in the SaaS space use MRR and its growth rate as a basic metric to judge startup performance. While this is the easiest and most generic measure of how fast your company is growing, it does not reflect where the growth actually comes from. It may also hide problems you have with your current customer base or even with the product itself. NDR (Net Dollar Retention) give more insight. NDR measures net dollar growth from your current customer base. Using an offline parallel, this is similar to the like-for-like (LFL) metric in retail, where it is often used to isolate sales from old stores from sales from new space or stores with different characteristics, which may skew the numbers.
What is inside the MRR calculation?
Deconstructing your MRR is not only important to understand where the growth (or lack of it) comes from but most of all it may allow you to reset your goals and change priorities. For instance, you may come to the conclusion that it’s easier and cheaper to upsell or simply retain current users instead of rushing at breakneck speeds to bring new customers.
Dollar MRR movements consists of:
+ Dollar MRR generated from newly acquired customers
Customer acquisition through various sales / growth tactics.
+ Dollar MRR generated from upgrading current customers
Upgrading customers for pricier plans, additional features or new products.
– Dollar MRR lost by customers cancelling subscriptions (churn)
Voluntary churn, delinquent churn or other type, it is vital to understand reasons for customers churning
– Dollar MRR lost by customers downgrading
Customers downgrading might suggest the pricing is not appropriately constructed, but there are numerous other reasons which you also have to understand.
And everyone will tell you that you should keep your net MRR growth positive in order to play the game with the VC crowd.
How to calculate Net Dollar Retention
Everyone also focuses on the first part of MRR movements – new acquisitions. However, that is just part of the story, let’s look how changes in other three components affect SaaS companies with a metric known as Net Dollar Retention. NDR is the growth generated from current customer upgrades minus customer downgrades and minus churn, all in dollar amounts. In order to keep you and your investors happy, the result of this equation should be on the positive side, which means you’re generating more revenue than lose from existing customer churn or downgrading. To put it in relative values, the numerator and denominator should be increased by the initial amount of MRR beginning of the period (MRRBeg). The higher above 1.0 the result gets, the better for scaling of the company.
Towards hyper-scaling SaaS
The research shows clearly that Net Dollar Retention above 1.0 is a common trait for all hyper-scaling SaaS businesses. Furthermore, having Net Dollar Retention above 1.0 is incredibly difficult for companies, so it works like a strainer showing only the strongest startups. For the regular founder though, the most important conclusion here is that you’ll have a much easier job growing the business when generating revenue from your existing customer base more than offsets any losses from that customer base.
Net Dollar Retention impact over time
Below you’ll find a chart presenting the impact on growth the difference in NDR levels of 1,02 and 0,98 has. In this case we assumed constant 5% growth in new customers starting with 10 000 users, 10$ ARPU and $100k MRR. On the surface both companies have the same New MRR performance, but over a 24 month period the Net Dollar Retention is responsible for an additional $182k difference in MRR! In both scenarios, each company grew significantly. But while an NDR level of 0,98 enabled the purple company to reach $248k MRR (140% growth in 24 months), the NDR level of 1,02 meant additional growth of up to $430k MRR for red company, a whopping 302% increase over the same period. Again, the growth of new users was constant at 5%, the changes came only from upgrading or downgrading the clients or churn!
Conclusion: Keep your friends close and your existing customers closer
The growth of light touch SaaS companies is dependent on tracking the data and working towards improving crucial KPI’s of the company. It is vital to remember that growth should not come only from acquisitions of new customers, but also from upgrading existing customers and reducing churn. Working on upgrading customers should be easier in theory (you can reach the customers directly) but it can be a very tough nut to crack. In the next article we will cover the means by which Net Dollar Retention levels can be increased.