Whether it’s the coffee shop down the street, a mobile app on your phone, or software used at work, any long-term, customer-focused business typically focuses on:
- Acquisition: Attracting new customers
- Retention: Maintain existing customer relationships and prevent customer churn
- Expansion: Deepening and broadening of existing customer relationships through cross- and up-sell
Companies strive for direct, long-term, and recurring customer relationships with high retention and expansion because these characteristics lead to more predictable revenues and profits. Predictable companies are more sustainable, easier to manage and usually rewarded with higher valuations than unpredictable ones.
Predictable companies are more sustainable, easier to manage and usually rewarded with higher valuations than unpredictable ones.
Software companies generally have relatively high customer retention and expansion compared to other business models. For software, two metrics are commonly used to measure retention and expansion:
- Gross Dollar Retention (GDR)
- Net Dollar Retention (NDR), also known as Net Revenue Retention or Dollar Based Net Revenue Retention.
DDR measures the preservation of an existing revenue book before expansion, while NDR expansion includes:
DDR and NDR are well-known and widely used metrics, often discussed in the context of growth. Software companies with an NDR of more than 100% grow their revenue organically each year by expanding their existing business book before adding new customers.
While NDR is not a required disclosure because it is a non-GAAP metric, public software companies often provide investors with visibility through a combination of shareholder presentations, public filings, and earnings calls:
Acquisition, Retention, Expansion: Why SaaS Founders Need to Understand DDR and NDR by Walter Thompson, originally published on australiabusinessblog.com