The one metric that many SaaS companies use consistently to determine revenue from current customers is Net Dollar Retention (NDR). In this time of economic upheaval, it is a metric needed to prove to your board and stakeholders that you are on the right track.
NDR can be expressed in a formula with specific components. To discover it, you begin at the period of revenue to be measured. For instance, it can be Q1 or only a month. You start with the amount of revenue derived from current customers you desire to measure. Perhaps it is the current segment of enterprise accounts. Maybe it is all low-touch/tech touch accounts. However, the key phrase is “current customers.” Retention anyone?
Let’s say the amount of revenue derived from your current customer segment measured is $100,000. Next, add revenue from upgrades, expansions, and cross-sells. Pretend it’s $50,000. However, that is not the end. You must also include revenue lost. So, subtract downgrades and churn. Maybe it was $25,000. That leaves you with $125,000. Divide it from the starting revenue amount—$100K, which should give you .125. To find the Net Revenue Rate percentage take the amount and multiple it by 100. The NDR percentage is 125%, which is a significant number! It illustrates that even though you may have down-sells and churn in your portfolio, other parts increased and offset your customer base’s losses. This, again, points back to retention or loss of it.
NDR demonstrates the influence of each of those factors (Upgrades, Expansions, Cross-sells, Downsells, and Churn) on your long-term business, especially if your goals are acquisition or an IPO. Companies usually have NDRs well over 100% to go public. Let’s go back to the formula and concentrate on the first value of Measured Revenue. Why? That number indicates the customers you keep or—retention. Do you see a common theme?
NDR
Period Measured Revenue ➕Upgrades/Expansions/Cross-sells➖Downsells/Churn
➗Period Measured Revenue
Multiply the amount by 100
SaaS companies are dependent on measuring current customers’ economic value, both individually or collectively, over any period in the duration of the relationship. Knowing the value of that relationship gives you a greater understanding of the economic impact they have on your business health. Measuring revenue over time may seem easy, but depending on where you are starting from or the company’s size or customer base, it could have difficulties. That is why it is essential to have visibility into your customer base. Again, NDR is all about retention.
Preserving revenue means measuring revenue. If you are beginning to use a platform that measures revenue, consider something that is multifunctional. Revenue at its core in SaaS is retention, and retention lasts by ensuring optimal use and adoption of your product. So, look at platforms that obtain feedback directly within your product. Gainsight’s PX allows you to concentrate on users that need specific attention, such as segmentation, user behavior, stage in the customer lifecycle, and role.
With Gainsight PX, you can visualize Retention and Funnel Analytics. Through varied segmentation model analysis, you can guide customers to their identified value. You can also see which areas of their product use are troublesome; when high-friction areas of your product, adoption increases, and overall retention increases. It is also easier to distinguish which product features connect to overall retention.
In PX, you can identify retention issues down to singular actions and lack of adoption. It can also encourage usage with in-app messaging, walk-throughs, guides, and personalized resource centers. Additionally, you can have visibility into segments to see which features are most successful and anecdotally understand if that feature’s success can translate to other customers or segments.
Adoption analytics is a beneficial insight as feature adoption also correlates with lifetime value and an idea of what decisions into product investments are successful. Path Analytics has value too. PX Path Analytics helps recognize how users create success with your most high-value features. You can thereby design more product guides with more significant impact. That means through analysis, you can reduce feature access from “three clicks” to “one-click,” producing efficiency and ease. Simply put, the more customers adopt and use, the more retention you create.
Retention, monitoring usage, and having a high NDR show that your product brings value to potential and current customers. NDR demonstrates that your customers are renewing and creating additional revenue for them after their initial sale. Because the cost of new customers or Logo is significantly more than retaining existing customers, keeping customers reduces Customer Acquisition Costs (CAC) and maintains, if not increases, profitability.
Retention is not about “set it and forget it.” It takes effort. Wouldn’t you like the path to both customer and revenue retention to be easier? Then start with Gainsight PX.
Download our e-book and get a detailed view of how to deliver personalized product experiences with a product-led strategy.
