“The forecast for 2006, for automotive, was for a $17 billion loss,” Alan Mulally recounted his grim first day as the CEO of Ford Motor Company. “And at the end of the year, we achieved that loss.”
Ford saw $12.7 billion vaporize that year. An outstanding loser in an already downbeat industry. Yet, that was why Mulally was brought in.
Before 2006, Ford had a fruit basket of desirable brands called the Premium Automotive Group (PAG), including – Jaguar, Land Rover (JLR), Aston Martin, Lincoln, Volvo, and Mercury. It cost them $17 billion and delivered nothing but hot air in return.
Mulally realized survival warranted that Ford moved back to core business disciplines: profitability and liquidity. He dismantled the PAG, selling JLR, Aston Martin, and Volvo – essentially kicking the bucket on Ford’s decades-long passion project, and in an obscure market, led with numbers.
More importantly, the right numbers.
Instead of focusing on market expansion (through a premium selection) and vanity metrics like net sales, Mulally unified the group under the ‘One Ford’ plan and doubled down on mass-appeal fuel-efficient cars that cost less to manufacture to claw back the gains somehow.
In 2008, when the U.S. government had to bail out the two other Detroit automaking bigwigs (General Motors and Chrysler), Ford stood – bruised, yet upright. By 2014, the company had registered 19-straight-quarters of profits.
‘Profitability and liquidity.’
SaaS growth rates made sense as value multipliers in the two years of easy money (circa 2020-21). Founders could bank on capital investments, invest in bold, beyond-the-horizon bets, and build a runway. But 2023 comes hot on the heels of a sharp valuation, customer, and cash contraction. VCs aren’t cutting new checks. SaaS is cutting jobs. Oh, and … have you seen the economy lately?
Today, growth metrics mean little else to investors than elevator music – still around, but nobody pays any real attention. Instead, as OpenView put it in their report on SaaS benchmarks, the focus is on net dollar retention (NDR):
“The public markets have oscillated from valuing growth rate alone to valuing rule of 40. For most operators, this shift—combined with a decrease [in] valuations and cash available—has led to a rapid decrease in spending. However, companies achieving top quartile NDR and CAC (customer acquisition cost) payback periods are immune from this oscillation.”
This is the story of survival and how, in an economically obscure world, SaaS companies must lead with numbers (and why that number is NDR).
A shift from volume to impact, and why NDR is a better metric than customer retention
It is simple to think of churn as the net outgo of customers (logos if you’re B2B subscriptions). It is also human to try to hold on to them for dear life. But in a world where time, resources, and bandwidth are limited – all logos aren’t alike. Some are scalable. Some simply aren’t.
Years later, when asked if Ford would have rather retained their marquee logos, former President and COO Sir Nick Scheele said –
“Had Jaguar Land Rover still been around, it could have turned the ship over. It was a mammoth cash drain, and in the dark times of 2008-09, cash was what was required.”
For SaaS, too, non-ICP or sparse adopters are a cash drain. They might provide a temporary revenue impetus but demand much more in return. You spend copious amounts of time or bandwidth in customer hand holding/troubleshooting apart from server and ops bandwidth consumption to maintain serviceability. A time that you could better spend nourishing and upselling your core customers.
“The relationship of new sale bookings to revenue retention is the SaaS version of ‘offense wins games, defense wins championships.'”
– SaaS Capital, 2023 B2B SaaS retention benchmarks
NDR (also known as net revenue retention or NRR) removes survivor bias by substituting customer/logo volume with the true dollar impact of every logo. Doing so sets a simple precedent – if net new sales dwindle, a successful business can still grow revenue through existing customers.
If SaaS is to play the comeback kid, it, too, needs to focus squarely on scalable, fat-free metrics. This means knowing that, in the long run, having stronger customers will have a greater impact on LTV (lifetime value) than many stagnant customers.
NDR is both a moat and a lever
Unit economics assumes apex importance during a cash crunch. But in the economics of scale, it means much more.
Typically SaaS valuations are calculated as multiples of revenue figures, specifically their ARR (annual recurring revenue). That’s because most private SaaS isn’t typically profitable yet. This previous status quo helped businesses raise funds without needing to become unit-economics efficient, where VCs found a promising candidate in the next ‘n’ years. Win-win.
A typical formula to derive the value of a business (when stripped naked) looks somewhat like this –
[Valuation = ARR * Growth-based value multiplier]
Yet, with the change in market dynamics, the relationship between growth rates and net sales is also changing. Today’s SaaS businesses see a higher correlation between growth and NDR, which in turn means – better NDRs give better value multipliers.
A study of over 1,500 private SaaS businesses also found that “the growth rates for groups of companies with NRR of at least 110% was higher than the population median, and the growth rate for companies with NRR below 100% was lower than the population median.”
High NDRs can lead to sustained improvements in the overall business revenue. Assuming your new acquisition rate is static year-on-year, retaining more income helps you register near-geometric growth in ARR without adding more proportionate sales muscle.
Suddenly, NDR ends up impacting both variables in the equation – both as a means to influence ARR and as a means to influence your growth multiple – in turn, powering SaaS valuations higher.
NDR as a litmus test for revenue growth
A critical measure for PMF (product-market fit) for any technology company is the ease of customer acquisitions. Still, yet another important one, according to Gainsight CEO – Nick Mehta, is “how sticky this product is, and how naturally it grows inside an organization?”
NDR, therefore, is about more than just customer retention. It is the ability to nurture them into upsells. In a world of one-trick ponies, your business must continuously drive value for sustained NDR growth.
In 2022, vertical pharma-SaaS Veeva crossed $2 billion in ARR, with just over 1,000 customers. Let that sink in. Their latest Q4 FY23 earnings call attributed it to their focus on “customer success and product excellence,” and sustained innovation.
Venture capitalist and data mogul Tomasz Tunguz suggests that the compounding effects of sustained NDRs will, with time, get to a point where “renewal revenue begins to dwarf the new bookings.”
“The key to sustaining high NDRs is ensuring the majority of the existing customer base continues to expand,” he said.
How to grow your SaaS NDR? Stick to the process
In the years we spent tinkering around with SaaS businesses on their revenue engines, we realized that increasing NDRs weren’t a product of strapping an upsell motion on top of a high-retention business model. There are no one-trick ponies in this race. Instead, it is about unit economic efficiency and compartmentalizing your efforts. Here’s how –
Lead with customer data
Beyond the genius of David Fincher, the success of the Netflix smash-hit – House of Cards is really owed to data analysis. Netflix read customer heuristics to identify a successful theme and determine playback duration.
Not just that, on realizing customers typically binge through complex storylines, the OTT platform launched the first 13 episodes together to engage binge-watchers, and activate social referrals, lending early impetus to the show.
The point is data is essential. Especially when it is data you own. And it helps you do two things to lift your NDR –
- Identify customer patterns to segment active customers and nurture them better,
- Use customer signaling to inform your upsell strategy and product roadmap
Mobility platform and Chargebee customer, Pliability understood this and quickly leveraged customer data to make multiple improvements to their product.
- First, on analyzing cancellation feedback, they realized that in-app music contributed significantly to their product usage experience. They moved to introduce new music customization features quickly, then.
- Realizing that many users would instead move down to a lower pricing plan than outright cancel, the team considered pricing experimentation and a more economical pricing tier.
Not only did the team score an immediate 20% improvement in churn, but they also found more value drivers for their customers by listening in more closely.
Chargebee also helps businesses extend data and dashboarding capabilities across the entire customer lifecycle. We know rich data lies hidden within the subscription black box. By connecting to all of your revenue tools, act as the central source of truth for all data relating to – subscription history, billing information, and usage.
It allows businesses to identify upsell and cross-sell opportunities and tailor their offerings to meet each customer’s needs.
Iterate, experiment, refine
NDR growth is a function of every detail that would affect forward revenue and LTV. This encapsulates your acquisition, pricing, discounting, loyalty strategies, and any other form of revenue optimization.
And like any good revision, it isn’t okay to jump a new pricing, plan, or product on your customers. You must first test it with a select section from your users, determine whether the effort is worth the outcome, and then do a full-blown launch to capture more revenue.
Sounds complicated? It isn’t. Chargebee allows you to make changes on all of it and more without strong-arming your development team into adding new lines of code or bulk to your servers. Instead, it will also allow you to launch A/B tests and sandbox the impact of your latest experiment before you take it to market.
If that’s not enough, you can also leapfrog into an entirely new acquisition model (self-serve or sales-led) and readily integrate with virtually any tool from CRM to payment gateways.
Identify power users, and retain them
Instead of investing bandwidth to retain every user (which also helps bring down your average ACV), first segment customers into cohorts.
For the conversion intelligence platform Unbounce, that meant mapping customer journeys and building cohorts based on customer details like – account tenure, usage, and other variables, with the help of Chargebee Retention. They then contextualized retention offers to each customer based on their specific stage and ROI to the business.
On A/B testing their new workflow in parallel to their previous, they quickly realized that automated offer personalization did not only help the business cut down the legwork but also allowed them to “actually deflect cancellations without introducing friction,” according to Max Tims, their (former) Director of Revenue Ops and Strategy. As a result, Unbounce deflected 11% of cancellations almost immediately.
Reduce up/cross-sell friction
Upsell isn’t just about adding a new revenue line item to your customer’s invoice. It is often about helping them find a unique value proposition from your business.
While add-ons and new packaging to introduce a feature are table stakes, it throws in a small spanner in the works of how you communicate the value added to your customers. Some problems are–
- A separate unit of charge for recurring value-added services
- A non-recurring charge on top of a recurring plan
- Combining subscription and usage-based components in your invoice
- Separate taxes for different plans and more
Bypassing any (or all) of these challenges is as easy as running a hot knife through butter with Chargebee. All you need to do is go to your subscription management portal, add a new product or plan, and accurately map the suitable unit prices and sales tax to the new product or model.
Once that’s done, the system works, does the math, and sends a cogent invoice at any stipulated date across any defined period. Convenient! Now you can configure add-ons and start collecting revenue immediately.
Great NDR offers significant compounding effects on your revenue
If you were in doubt about the geometric effect of a stitch-in-time decision, Ford made a profit of $1.8 billion in the first three months of 2023, a quick rebound from supply chain issues and a far cry from their near-bankruptcy back in 2008. A tough call made early on renders huge payoffs later. Simple, economics of scale.
Now assume a SaaS business with – a $1 starting ACV, no net new sales, and a 200% NDR. Simply having a 200% NDR guarantees that their ACV (doubling each year) is 16X in 5 years. The graph looked like this when Tomasz Tunguz plotted the same progression with different starting ACVs –
Ensuring NDR growth at the very early stages of a business offers progressive revenue growth. It ensures you can use the cash legroom you’d inevitably generate to make market-moving decisions.
In a market that values unit economic discipline, NDR helps businesses look over their shoulders to understand how profitable they have been and how liquid they could get. It is the Mendoza line for profitability and liquidity.
And where cash runaways potentially differentiate between businesses that would ride the re-emergent S-curve and one that would find the upward slope too slippery, which side would you rather be on?
Optimize revenue, affect changes to your pricing/plans, and more, squeeze a better dollar juice out of every scalable customer, and join 4,500+ other businesses in acing NDR growth with Chargebee.