SaaS IPO Net Dollar Retention Benchmarks
Dollar retention is critical to the health of a SaaS company; companies should always understand if they acquire $100 of revenue today, what will that be worth over time? The best companies are usually able to show that $100 from a customer cohort in year 1 will grow to $120 or more by year 2, and over time that number could get significantly larger. This is called “net negative churn”. A SaaS company could be growing ARR (annual recurring revenue) over 100% each year, but if their annualized net dollar retention is less than 75%, there is likely a problem with the underlying business. The top-line growth will be masked for only so long — poor net dollar retention will almost always catch up and slow a business’s top line.
Depending on the business model, companies can increase their share of wallet from customers by increasing their users, selling them more products, marketplace revenue (if offered), other add-ons, and renewing them at higher pricing tiers. For example, Atlassian was able to show in their S-1 that $1 of spend in year 1 would become $7 of spend by year 5, on an indexed cumulative basis (see the image below).
I took the group of high-growth SaaS IPOs I track and benchmarked their net dollar retention rates. While most of the companies in the group disclose some type of retention metric, I only focused on dollar retention and left out logo retention. I will caveat this with saying that most of these companies define this metric in slightly different ways, so while it’s not quite apples-to-apples, it’s interesting to see nonetheless. Most even use a different term and some will leave out certain customer segments (i.e. Box excludes customers <$5K in ACV). Being on the underwriting side of SaaS companies in a previous role, companies tend to pick the most attractive definition. For those interested, here is a list of the companies’ dollar retention disclosure along with definitions.
See the chart below where I separated companies by type — net dollar retention figures (which includes upsells, etc.) and those that just disclose gross dollar retention (excluding the benefit of upsells).
You can see that almost all of these companies have net dollar retention figures (even if defined slightly differently) over 100% — the median is 117% for net dollar retention disclosure and 92% for gross dollar retention disclosure. There are a lot of factors that go into this number, such as end customer segment i.e. SMB or enterprise, pricing model, products available for upsell and cross-sell, etc., but SaaS companies should strive to be over 100% on a net basis.
Ideally, we’d be able to see this by customer segment, but it’s not disclosed. For example, Hubspot had a 90% net dollar retention figure at IPO, and today it’s over 100%. The company has been releasing more products and moving up-market where customers tend to churn less and can spend more. For best-in-class, high-growth private SaaS companies, the numbers are similar. If you look at slide 58 of the KeyBanc Capital Markets SaaS Survey (fka Pac Crest) you can see that the net dollar retention median is 101%. There were also many companies in the survey with well over 100% net dollar retention.
For private investors, net dollar retention is one of the most important factors when evaluating a SaaS company. I’ve seen great businesses add the same (or slightly less) amount of logos per year but still grow very quickly and efficiently due to high net dollar retention rates, even with similar average ACVs. In some cases, the number can be used to justify increased spend on customer acquisition — if a business consistently has annualized net dollar retention of over 140+% each quarter, it could be a good idea to spend more on customer acquisition, even if the paybacks are ~18+ months. Those cohorts can be very profitable over time. The contrary is also typically true; if a business has low net dollar retention (<75%) they should probably spend less on acquiring new customers and assess why their current customers are churning and/or spending less.
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.
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