In this manic world of SaaS, SPACs, and shorts, money and valuations have taken center stage, for better or worse. In the cloud world, though, there is a big gap between the highest and lowest-valued companies. So what does it take to get to the top?
Net Dollar Retention Rules
Growth rate, gross margin, and other traditional metrics matter greatly. But software leaders have increasingly recognized the importance of a new metric unique to the SaaS world, Net Dollar Retention (NDR). As a reminder, NDR looks at your existing customers at the beginning of a period (e.g., beginning of the year) and calculates a ratio of the dollars that pool of customers (with no new ones) is spending at the end of the period divided by the dollars from that pool at the beginning of the period.
As you can see from the below chart from July of 2020 from Software Equity Group, Net Dollar Retention strongly correlates to SaaS valuation. While the world has changed a lot from July (i.e., valuations are WAY higher), the connection still holds. Indeed, in my experience in conversations with public investors like hedge funds, the first question that they ask is, “what’s your NDR?”
David Kellogg, the prolific and profound SaaS CEO who writes Kellblog, recently shared a set of 2021 predictions, which included this gem:
- Net dollar retention (NDR) becomes the top SaaS metric, driving companies towards consumption-based pricing and expansion-oriented contracts. While “it’s the annuity, stupid” has always been the core valuation driver for SaaS businesses, in recent years we’ve realized that there’s only one thing better than a stream of equal payments – a stream of increasing payments. Hence NDR has been replacing churn and CAC as the headline SaaS metric on the logic of, “who cares how much it cost (CAC) and who cares how much leaks out (churn) if the overall bucket level is increasing 20% anyway?” While that’s not bad shorthand for an investor, good operators should still watch CAC and gross churn carefully to understand the dynamics of the underlying business.
If you want to dive in more on why Dave thinks NDR is the new metric, see his SaaStr presentation here.
Customer Success 2.0 = Net Dollar Retention
In parallel, the Customer Success space has significantly evolved since its early days. Many CS teams started focused on defense – “firefighting,” customer health management, and churn. And they had a big impact. But the field has evolved. We all realize, like in sports, that the best defense is a good offense. McKinsey captured the spirit of this in their article on Customer Success 2.0, calling it “the new growth engine.”
Underlying this discussion is a principle that true Customer Success requires a proactive focus on the clients’ desired outcomes (versus reacting to client issues). In this process, Customer Success isn’t antithetical to growth and sales but instead in perfect alignment. As such, the highest-performing Customer Success teams are generating leads for sales and helping to drive growth and expansion.
How to Grow Your NDR
Given the enthusiasm around moving to offense and focusing on NDR, we asked a panel of Customer Success executives how they planned to grow NDR in 2021. We then ranked the answers based upon which initiatives were “Very Important,” focusing on the truly critical initiatives. Below is a ranking of the top initiatives. We’ll cover each of the top 6 below.
1. Value-based selling and delivery
As I mentioned above, the most modern Customer Success teams realize that CS is all about delivering desired outcomes. We set expectations on outcomes and value in the sales process, and we need an integrated approach across Marketing, Sales, Implementation, Customer Success, Renewals, etc., to get there.
In some ways, this is all about breaking the dated dichotomy between “pre” and “post” sales.
We shared a playbook here for driving end-to-end outcomes and value and an example from Splunk of how they do this incredibly well.
2. Driving product adoption
One of the biggest drivers of dollar churn is customer reducing entitlements or consumption. And one of the biggest accelerators of net retention is increasing usage. As such, companies are investing heavily in tactics to drive product adoption. Just like B2C companies’ “growth hack” usage of popular apps, B2B businesses are using in-product guides to nudge users along toward health adoption, as Adobe shares here.
3. Renewal/churn risk identification
Unlike wine, churn risk doesn’t get better with age. Indeed, for most companies, when they identify risk in accounts, it’s too late. But early risk management can not only reduce churn, it can also turn a “red account” into an expansion—the “pick six” of SaaS. Conversica shares how they did this by moving their renewal process to a much more proactive model.
4. Onboarding
The survey participants observed one of the oldest adages in Customer Success – it all starts at the beginning. As such, onboarding is a critical moment of truth in Customer Success. Onboarding means everything from setting up companies to enabling individual users. We’ve shared how Adobe onboards its administrative users through in-product walkthroughs, how companies use “tech touch” to scale onboarding, and how we at Gainsight tried to “practice what we preach” to reduce our onboarding time by 66%.
5. Product roadmap to align to client needs
At the end of the day, for most software companies, the biggest lever is… the software. As such, there is no better way to move NDR than to make the software better aligned to client needs. Most Customer Success teams in enterprise accounts spend a big part of their time managing client feature requests and advocating for them with Product. At Gainsight, we shared the process we use to address these customer “product risks.” More generally, the way to improve NDR longer term is to close the gap between your clients’ desired outcomes and what the product delivers.
6. High touch client management
In businesses with large clients, one client can make or break NDR. In addition, the clients with the largest expansion potential tend to be the biggest ones. As such, “high touch” Customer Success has a big impact on Net Dollar Retention. In this post, I shared how I use Gainsight as CEO to stay on top of our largest clients’ needs.
Turning Insights into Action
So, now that we’ve helped you understand what NDR is, why you should consider it a cornerstone metric for understanding your business’ overall health and valuation, and how several proven industry leaders are growing retention through six key initiatives, what are some next steps to help set you on the right path to crushing NDR?
We are going to make 2021 the year of Net Dollar Retention at Gainsight. Next up, check out our new LinkedIn Live series, Net Retention TV! (yes, that’s the nerdiest TV show ever) On March 18th at 1:30 PM PT, visit the Gainsight LinkedIn page to watch me interview the aforementioned Dave Kellogg about NDR. See you then!
