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Dave Kellogg GainSight Pulse Everywhere 20201: NDR Key Benchmarks

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Dave Kellogg GainSight Pulse Everywhere 20201: NDR Key Benchmarks

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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.

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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Dave Kellogg GainSight Pulse Everywhere 20201: NDR Key Benchmarks

  1. 1. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. 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 1 All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License.
  2. 2. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. 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
  3. 3. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. The Answer Is 104% Slide 3
  4. 4. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. Agenda • How did NDR become the metric of choice? • Why NDR matters? • What does good look like? Slide 4
  5. 5. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. How Did NDR Become The Metric of Choice? Slide 5
  6. 6. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. 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.”
  7. 7. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. 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 Slide 7
  8. 8. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. “ARR is a fact. LTV is an opinion.” (As was once said about cash versus profit) Slide 8
  9. 9. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. 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 Slide 9
  10. 10. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. 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 10
  11. 11. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. Why NDR Matters? Slide 11
  12. 12. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. NDR is a Key Company Valuation Driver Slide 12 Source: Meritech Public Comps – see references slide
  13. 13. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. 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
  14. 14. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. 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 Slide 14
  15. 15. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. What Does Good Look Like? Slide 15
  16. 16. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. RevOps2 B2B Benchmarks Report Slide 16 Source: RevOps Squared, pre-release report https://www.revopssquared.com/ Breaking
  17. 17. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. 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% Slide 17 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
  18. 18. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. 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 Slide 18
  19. 19. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. OpenView NDR Analysis by Pricing Model Slide 19 Source: OpenView Expansion SaaS Benchmarks
  20. 20. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. Thinking About Consumption-Based Models Slide 20 Sound familiar? Source: https://openviewpartners.com/blog/usage-based-pricing-2-0
  21. 21. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. 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 Slide 21
  22. 22. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. Appendix Slide 22
  23. 23. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. UiPath S-1 Excerpt Slide 23
  24. 24. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. OpenView NDR Pie Chart Slide 24 Source: OpenView Expansion SaaS Benchmarks
  25. 25. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. OpenView NDR by Target Customer Type Slide 25 Source: OpenView Expansion SaaS Benchmarks
  26. 26. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. Meritech Public Comps Table Excerpt Slide 26 Source: Meritech Public Comps
  27. 27. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. JMP NDR Bar Chart (Coverage Universe) Slide 27 Source: JMP Securities
  28. 28. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. JMP GDR (Gross) Bar Chart (Coverage Universe) 28 Source: JMP Securities
  29. 29. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. RevOps2 Gross (GDR) Rates Slide 29
  30. 30. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. KeyBanc Gross Churn by Company Size Slide 30
  31. 31. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. WalkMe S-1 Highlighting NDR in Size Segment Slide 31 Source: https://www.meritechcapital.com/blog/walkme-ipo-s-1-breakdown
  32. 32. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. Snowflake Metrics from Public Comps Slide 32 Source: https://publiccomps.com/
  33. 33. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. Bessemer Usage-Based Premium Slide 33 Source: https://www.bvp.com/atlas/state-of-the-cloud-2021
  34. 34. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. Insight Case for Usage-Based Pricing Slide 34 Source: https://www.insightpartners.com/blog/how-usage-based-pricing-fueled-two-2020-ipos/
  35. 35. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. Insight Usage-Based != Pay As You Go Slide 35 Source: https://www.insightpartners.com/blog/how-usage-based-pricing-fueled-two-2020-ipos/
  36. 36. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. Snowflake S-1 Net Revenue Retention Rate Slide 36 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?
  37. 37. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. 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?
  38. 38. All content licensed under Creative Commons Attribution-NonCommercial 4.0 International License. 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 Slide 38

Editor's Notes

  • Additional fallacy = annuity assumption, i.e., that ARR was stream of steady (non-increasing) payments
  • Slide is less about net dollar retention vs. net euro retention vs. net contract-size retention and more about reminding people of exchange rate impacts on the ARR pool and NDR.
  • R^2 = coefficient of determination
  • On theory that in early stages you really shouldn’t be that focused on expansion, unless you are trying to prove out land-and-expand model if there’s some doubt it will work. Usually early days are more land-focused.
    See OpenView for best $0 to $50M metrics
  • Do this wrong, get either
    1. Big commitment with big minimum that doesn’t get used
    2. Big overage charge that customer hates
  • ×