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Whether it’s a coffee shop down the street, a mobile app on your phone, or software at work, any long-term-thinking, customer-centric company focuses on:
- Acquisition: Attracting new customers
- Retention: Maintaining existing customer relationships and preventing churn
- Expansion: Consolidating and expanding existing customer relationships through cross-selling.
Companies seek to maintain and expand direct, long-term, and frequent customer relationships because these attributes lead to more predictable revenues and profits. Predictable businesses tend to last longer, are easier to manage, and typically reward higher valuations than speculative ones.
Predictable businesses tend to last longer, are easier to manage, and typically reward higher valuations than speculative ones.
Software companies tend to have relatively high customer retention and expansion compared to other business models. For software, two metrics are commonly used to measure maintainability and scalability:
- Gross Dollar Retention (GDR)
- Net dollar retention (NDR), sometimes referred to as net income retention or dollar-based net income retention.
GDR measures retention of the pre-expansion book of income, while NDR includes expansion:
Image Credits: Index Venture
Image Credits: Index Venture
GDR and NDR are the most well-known and widely used parameters, often discussed in the context of development. Software companies with over 100% NDR grow their revenue each year just by expanding their existing book of business before adding new customers.
While NDR is not required disclosure, as it is a non-GAAP measure, public software companies often provide visibility to investors through a combination of shareholder presentations, public filings and earnings calls:
Acquire, Retain, Scale: Why SaaS Founders Need to Understand GDR and NDR By Walter Thompson Originally published on TechCrunch
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