Net Dollar Retention: The ‘Holy Grail’ SaaS Metric
Atlasview Insights -- bite-sized weekly insights that are relevant to all small business owners, dealmakers, and investors.
Welcome back to another week of Atlasview Insights. This week we’re looking at:
The holy grail of all SaaS metrics
What public markets have done to SaaS valuations
The importance of ROIC
Before we get into things, if you are a business owner, deal intermediary, or advisor with a company that could be of interest for a transaction, feel free to reach out. Atlasview has ample dry capital and LP relationships excited to invest alongside us!
Net Dollar Retention: The ‘Holy Grail’ SaaS Metric
Our team uses a wide range of metrics and formulas for evaluating the health and growth potential of potential investment opportunities. While many of these metrics play an important role, we believe that one of the most important metrics is net dollar retention (NDR).
Here’s a deep dive into the metric, and some tips for SaaS operators looking to improve their businesses’ NDR:
What is Net Dollar Retention?
It is the measure of how much of your recurring revenue you keep each year (or month, depending on the time frame of measurement). It can also be referred to as net revenue retention.
Why Is NDR So Important For Software?
As private equity buyers, we look at mature SaaS businesses. Unlike VCs that invest based mostly on future potential, PE buyers invest based on what’s already been built.
SaaS businesses are built on intangible assets consisting of their actual software and the customers that use it. Net dollar retention can measure the quality of these two intangible assets.
How Can Operators Improve Their NDR?
Below are a few tactics that software owners can use to improve NDR and achieve a negative churn rate:
Invest in customer service and success
The ROI for a dollar invested into retaining an existing customer can be far higher than a dollar invited to acquire a new one. Investing in customer service/success should lead to improving your NDR and LTV. A higher NDR/LTV will only make your new customer acquisition efforts more profitable.
Implement usage-based pricing
Usage-based pricing is a great pricing method as the customers that derive the most value from the software (those who use it the most) are usually willing to pay more for it anyways. Implementing a pricing strategy that scales with usage means existing customers upgrading each year which can drastically improve your net dollar retention.
Increase prices regularly
Many software business owners are afraid to increase prices on their customers, fearing they might churn. But the reality is, software is often such a small line item on many customers’ P&Ls. If you get into a habit of regularly increasing your software prices on your existing customers each year, this will certainly improve your net dollar retention.
Cross-sell complementary products
Launching new features and products is a way for existing customers to spend more money with you. You can also automate cross-selling within your software and by educational emailing marketing to your existing customers.
Focus acquisition efforts on heavy users
Figure out who your most loyal customers are, the customers that use your software the most, and derive the most value from it. Focus all or the majority of your customer acquisition efforts on this type of customer. By concentrating your S&M dollars high NDR/LTV customers, you’ll improve your NDR (and achieve a better ROI).
Final Thoughts
A high NDR is a telltale sign of a high-quality software business, one that we’d want to be an investor in. If you run a software or tech-enabled business that has a high NDR, feel free to reach out.
Partner With Atlasview Equity
We look for the following characteristics in our partner companies:
Industry: Software and tech-enabled businesses
Business Profile: Sticky B2B customer base
Size: Minimum $1m EBITDA or $5m ARR
Geography: The US & Canada
Whether you’re a business owner interested in working with us, or an intermediary with a deal to share, always feel free to reach out and get in touch with us!
Public SaaS Headwinds
Atlasview Q&A
Question: What’s the most important financial metric to look at when evaluating businesses across multiple sectors?
Jay’s Answer:
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Atlasview Equity is a private equity firm specializing in software and tech-enabled businesses. We combine patient capital with proven operational strategies to deliver predictable results for our stakeholders.