I’ll be speaking at the Gainsight Pulse Event in London this week and it has challenged me to note why Positive Dollar Retained Revenue (DRR) is my favourite SaaS Metric in the sea of choice.

Losing customers is killing my interest in your business

I’ll be speaking at the Gainsight Pulse Event in London this week and it has challenged me to note why Positive Dollar Retained Revenue (DRR) is my favourite SaaS Metric in the sea of choice.

Generally speaking, there are two strategy related metrics I’m interested in above all when appraising an investment opportunity:

Firstly, has a company demonstrated a proven capacity to win customers, to add annualised contract value (ACV) and if the business model dictates it, to increase the average order value? When thinking of customer acquisition, I am drawn to companies whose desire and strategy is focused on dominating their defined market & so I’m not so interested in “this is how we win another big enterprise account” I’m interested in how we mass adopt large market share - but that’s not for this post. Maybe one for later.

This piece is about what happens post-acquisition and how you build an enduring company for current and future generations of buyers and users. My second consideration is - What’s the relationship over the initial 12 month period (and beyond) between the customers acquired and those that churn (and why) versus those who buy more (and why)?

Companies that are able to consistently win customers and then retain them, whilst simultaneously increasing the revenue derived from them are very, very rare, making up less than 5% of the companies that we see, EVER. This scarcity is seriously valuable.

This is due to the importance of customer retention and the upsell element of this equation, that Dollar Retained Revenue (DRR) has become my favourite SaaS metric. We also believe that it’s the second biggest driver of valuations in the public markets behind revenue growth.

If a company is able to show a DRR figure in excess of 100% (i.e. the revenue that they derive from a constant cohort of customers increases over time despite churn) then all other considerations are largely invalidated. If customers are buying, staying and increasing how much they are buying over time, then we are off to a good start and any opinions that I might have about the market, product or even the business model, become somewhat secondary (not the same as irrelevant).

The fact that so few pitches actually demonstrate this, marks out those that do, as an entirely different class of investment. A totally different class from an investment proposition perspective and very attractive to a wider set of investors.

There are two ways of presenting DRR numbers, on an annual basis and on a cohort basis. The DRR numbers contained in S1s are typically on an annual basis. However, I prefer the extra the granularity that you get from using the cohort basis.

For example, I like to know that the DRR of customers signed up in September was 110% but, for those signed up in October, it was only 90%. At Notion we consider anything above 100% to be good, with over 110% classed as better, and the really exceptional companies get close to and occasionally exceed 125%. The table below shows what would be the DRR breakdown for an exceptional company, consistently above 110% and seldom dropping below 100%.

Once you know the DRR numbers, it is possible to do something about it. Sign up more customers similar to the ones you signed in September! Too often, in the early years founders and CEOs find it difficult to segment their customers. However, those that can segment, run a highly repeatable process to acquire more of the same, following a similar path to upsell and retain +’ve DRR; we consider these to be a totally different class of Execs. These playbooks harden over time and become the platforms for future success.

Andrew Chen & Christoph Janz explains the cohort DRR based method brilliantly their blog.

The last challenge is the ‘Why’. Why are some companies buying more and some companies are churning so fast you come out in a rather expensive low LTV rash! Well Dan Steinman wrote the book on it (literally) – he’s the godfather when it comes to Customer Success. Consume his book and follow his content - it's a Goldmine!!

Posted by Chris Tottman, Partner at Notion and Sam Albiston, Analyst at Notion

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