There are many metrics when evaluating businesses. As certain business models get popular, for instance SaaS, they develop numerous metrics that become imperative to the nomenclature of other business models as well.

Terms like customer acquisition costs (CAC), lifetime value (LTV), annual/monthly recurring revenue (ARR/MRR), customer churn, revenue retention, etc…

Much of what these terms represent may not be new but as far as educating the modern-day investors go, they get closer to being foundation-level knowledge. I came across the term dollar retention rate and I had never heard about it before.

As far as retention rates go, I’ve been familiar with customer retention and customer churn. They’re just two sides of the same coin to figure out how many customers a business can keep over a set period (usually annually).

Turns out, dollar retention rate (DRR) is used interchangeably with net revenue retention (NRR) and Net Dollar Retention (NDR). I guess we’re waiting for all the VC funds to approach the metrics with a unified front?

The equation for NDR is as follows:

(Starting MRR + expansion — downgrades — churn)/ Starting MRR *100 = NDR

And what does this measure?

How much recurring revenue (ARR/MRR) a company retains with its existing customer base. Expansions are upgrades to a plan (going basic $10/month to premium $25/month), downgrades are the other way from expansion and churn is when they leave the product altogether.

Generally, NDRs of 100%+ mean the business was able to increase revenue from existing customers. This would signal one instance of organic growth in the business. At least we know the existing customers are paying more to offset others leaving.

Apparently 109% NDR is a median standard for SaaS companies. But take it with a grain of salt, as that’s what I’m doing. The list of companies in the article is entertaining if not anything else. Here’s another list of IPO’d SaaS companies and their NDRs per S-1s… Shopify was at 101% in 2014

So simply, below 100% is no bueno and above is bueno. I would also overlay that with the need to see these values over a number of years.

There there is GRR, Gross Revenue Retention.

That’s NDR/NRR without the expansion.

GRR = (Starting MRR – downsell – churn)/Starting MRR

GRR maxes out at 100% as it measures how much of the existing customer base is retained. It gives a potential look at the health of the product.

If the GRR is much lower than the NDR, then the NDR might be hiding the fact that most customers don’t find the product valuable and indicate long-term problems for the company.

It makes me think that GRRs are a good indicator for assessing the staying power of the product in question. If people upgrade that’s awesome but not having anyone leave over a number of periods might indicate a real necessity for the product in the life of the customers.

Slack has a 144% NDR, Twilio went from 124% to 140% and so it makes one really think about whether the valuations we see on such companies in 2020 might even be reasonable. I don’t know much about these companies so this isn’t advice but this seems to be a set of metrics to be aware of for further context when learning about new businesses.