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Whether it’s the coffee shop down the street, the mobile app on your phone, or the software used at work, any long-term, customer-centric company typically focuses on:
- Acquisition: Attracting new customers
- Retention: Maintaining existing relationships with clients and preventing disruption
- Expansion: Deepening and broadening existing relationships with clients through cross-selling and up-selling
Companies aspire to establish direct, long-term, and repeat customer relationships with high retention and expansion because these characteristics lead to more predictable revenue and profits. Predictable businesses are more durable, easier to manage, and are usually rewarded with higher valuations than unpredictable ones.
Predictable businesses are more durable, easier to manage, and are usually rewarded with higher valuations than unpredictable ones.
Software companies tend to be relatively customer retention and scale 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), sometimes referred to as Net Revenue Retention, or Net Revenue Retention in Dollars.
GDR measures the retention of an existing revenue history prior to expansion, while NDR includes expansion:
Image credits: Index Ventures
Image credits: Index Ventures
GDR and NDR are widely known and used metrics, and they are often discussed in the context of growth. Software companies with an NDR of more than 100% naturally increase revenue each year just by expanding their existing business book before adding any new customers.
While the NDR is not a required disclosure, since it is a non-GAAP metric, public software companies often provide visibility to investors through a combination of shareholder presentations, public filings, and earnings calls:
Acquisition, Retention, and Scale: Why SaaS Founders Should Understand GDR and NDR by Walter Thompson originally posted on TechCrunch