Whether it’s the coffee shop down the street, a mobile app on your phone, or the software used at work, any long-term, customer-focused company typically focuses on:
- Acquisition: Attract new customers
- Retention: maintaining existing customer relationships and preventing churn
- Expansion: Deepening and expanding existing customer relationships through cross-selling and up-selling.
Businesses aspire to have direct, long-term, recurring customer relationships with high retention and expansion because these characteristics lead to more predictable revenue and profit. Predictable businesses are more durable, easier to manage, and generally rewarded with higher valuations than unpredictable ones.
Predictable businesses are more durable, easier to manage, and generally rewarded with higher valuations than unpredictable 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 retention and expansion:
- Gross dollar withholding (GDR)
- Net Dollar Withholding (NDR), sometimes referred to as Net Income Withholding or Dollar-Based Net Income Withholding.
GDR measures the retention of an existing revenue book prior to expansion, while NDR incorporates expansion:
Image Credits: company index
Image Credits: company index
GDR and NDR are well-known and widely used metrics, often discussed in the context of growth. Software companies with NDRs greater than 100% grow revenue organically each year simply by expanding their existing book of business before adding new customers.
While NDR is not a required disclosure, as it is a non-GAAP metric, public software companies often provide visibility to investors through a combination of shareholder presentations, public filings, and earnings calls:
Acquisition, retention, expansion: why SaaS founders need to understand GDR and NDR by walter thompson originally posted on TechCrunch
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