NDR Is Your MVP
Net Dollar Retention is the most important valuation metric in the technology industry. With all new and 80% of historical software vendors now operating on subscription-based business model (Gartner, 2018), the adoption of subscription and consumption revenue models has achieved dominance. If you look at the most valuable B2B technology companies today (think Snowflake, SentinelOne, and Bill.com), you’ll notice a common theme that unites them all – an unwavering focus on mastering the disciplines required to retain and expand their customers in service of strengthening Net Dollar Retention (NDR).
With analysts, investors, CEOs and CFOs all focused on this one powerful metric, you’re at great risk of falling behind the competition if you don’t prioritize NDR. Without a comprehensive view of the ongoing health of your customers and company, you may oversee potential threats and opportunities that can result in customer and revenue churn and poor net retention rates.
Straight from the industry’s leading experts, here are 3 data-driven reasons why Net Dollar Retention must be the north star metric for measuring the impact of your customer lifecycle on your business.
1. NDR Is The Metric Of Choice For Investors
“Net dollar retention has a huge impact on the long-term success of a business; the companies that get public usually have net dollar retention rates of well over 100%, and in some cases 150%+. It’s unfortunately at times overlooked, but increasingly becoming one of the most core KPIs for any SaaS company.”
– Alex Clayton, General Partner at Meritech Capital
In the era of the subscription and consumption revenue models, B2B technology companies are evaluated and valued on their ability to drive strong and consistent revenue retention. According to a study by SaaS Capital, for every 1% increase in net revenue retention, a SaaS company’s valuation increases by 12% after five years (2020). Businesses that achieve high net retention rate and expansion rates reduce investment risk, generate efficient and sustainable revenue growth and set themselves up for higher profitability margins. As a result, Net Dollar Retention has become the go-to metric for investors determining the valuation of B2B technology companies.
2. NDR Is The Clearest Indicator Of Your Customer Lifecycle’s Health & Performance
“Net Dollar Retention—which includes churn and expansion—more completely captures the story of how customers are evolving.”
– Nick Mehta, CEO, Gainsight
While there are a multitude of metrics that are useful in gauging the performance of your customer lifecycle, such as Customer Acquisition Cost (CAC) and Customer Acquisition Cost Payback (CAC Payback), none is as powerful as NDR in assessing the impact, efficiency and scalability of your customer lifecycle. Factoring upgrades, downgrades and churn, NDR gives the clearest picture of how much growth a company is able to generate from existing customers and, by extension, how much value those customers are realizing from their usage of your product(s).
Breaking Net Dollar Retention down into its leading and lagging sub-metrics provides a holistic view of how well the phases of your customer lifecycle and the functions within it are integrated to drive customer value realization. In essence, it’s a robust indicator of your company’s growth potential. According to a study by SaaS Capital, higher growth is generally associated with higher net retention rate, and vice versa. Companies with net retention rate between 100% to 110% reported median growth of 40%, companies with net retention rate above 110% reported median growth of 60%, while companies with lower net retention rate reported median growth of only 30% (2020).
3. NDR Drives The Business Case For Investing In Customer Success
“NDR buys Customer Success a seat at the table.”
– Dave Kellogg, Executive-in-Residence (EIR) at Balderton Capital & Principal at Dave Kellogg Consulting
The Customer Success (CS) function has only recently broken through the glass ceiling and joined the C-Suite table. In this journey, NDR has played a pivotal role in helping CS secure their spot. Firstly, it gave CS leaders a clear and well-established identity and ownership of an important metric. Secondly, it definitively proved the ROI on building a Customer Success organization and operationalizing it with specialized technology and data like Gainsight.
As NDR showcased the value of CS’ contributions to the business, it also made conversations with the CFO more impactful. By using Net Dollar Retention, CS leaders are able to clearly demonstrate how proper financing of Customer Success can drive sustained growth and performance. With these powerful numbers in their arsenal, CS leaders are able to garner enthusiastic investment and support in CS from the top-down.
Amplify Your Potential With NDR
The era of Net Dollar Retention is here. NDR has quickly cemented its place as the north star for B2B technology companies seeking to maximize their growth and valuation. Given the criticality of this metric and its leading role in determining your company’s overall health and valuation, it’s vital that you align your entire organization, from Pre-Sales to Post-Sales, around NDR.
Have you determined the right path to best-in-class Net Dollar Retention? ValueXperience is the proven framework for B2B technology companies seeking a connected and collaborative customer lifecycle to enable best-in-class Net Dollar Retention.
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