Revenue & Retention: What is our growth profile?

Question 1

What does YoY ARR Growth measure?

Revenue & Retention

Answer 1

Measures: How quickly are we growing our recurring revenue?

Commentary:
- LTM figures are best when available
- Need to watch for seasonality

Question 2

What does Net Revenue Retention (NRR) measure?

Revenue & Retention

Answer 2

Measures how customers from last period are spending this period.
* Signals the efficiency of a company’s growth by measuring its ability to retain and expand existing customers
* Without the benefit of adding any new customers, how much do our existing customers spend with us the longer they’re with us?

Commentary:
* Arguably the MOST IMPORTANT metric to measure the health of a SaaS business as it is correlated with everything from product market fit to customer health
* NRR for a healthy business exceeds 100% due toits ability to expand with existing customers (via upsell and cross-sell ARR)
* Also referred to as “Net Dollar Retention”

Many ways to calculate NRR:
* Annual net retention
* Annualized quarterly net retention
* Customer cohort analysis

Calculation Specifics:
* Excludes New Logo ARR
* When using quarterly data best to look at current quarter and annualize NRR to capture QoQ changes (particularly important when companies are smaller)
* Numerator can be revised to = Ending ARR - New Logo ARR
* Some firms use average of Beginning and Ending ARR in denominator to smooth figures

Question 3

What does Gross Revenue Retention (GRR) measure?

Revenue & Retention

Answer 3

Measures ARR retention excluding the impact of New Logo and Expansion ARR.
* If a SaaS company has strong NRR due to ability to expand with existing customers, calculating GRR may uncover underlying churn and downsell dynamics that may be bubbling below the surface of a strong NRR metric

Commentary:
* GRR by definition must be below or = to 100%
* Also referred to as “Gross Dollar Retention”

Many ways to calculate GRR:
* Annual gross retention
* Annualized quarterly gross retention
* Customer cohort analysis

Calculation Specifics:
* Excludes New Logo and Expansion ARR
* Some firms exclude Downsell ARR from GRR
* When using quarterly data best to look at current quarter and annualize GRR to capture QoQ changes (particularly important when companies are smaller)
* Some firms use average of Beginning and Ending ARR in denominator to smooth figures

Question 4

What does Logo Retention measure?

Revenue & Retention

Answer 4

Measures what percent of customers from last period are sticking with us and still spending this period.

Commentary:
* Measures retention on # of customers, not customer spend
* Logo retention by definition must be below or = to 100%
* Usually it is more helpful to look at dollar based retention metrics than logo retention as large customer spend may be leaving or significant downsells occurring which isn’t captured in logo retention metric
* Important input to calculation of customer liftetime value (LTV) metric

Calculation Specifics:
* Can be calculated as an annualized figure based on quarterly data to smooth QoQ changes but typically understood as an annual metric

Question 5

What does the SaaS Quick Ratio measure?

Revenue & Retention

Answer 5

Measures the magnitude of ARR gained versus ARR lost in a given period.
* We may have high ARR growth or strong NRR, but under the surface we may actually be losing a lot of ARR through downsell and churn ARR

Commentary:
* A high SaaS quick ratio is desirable, but doesn’t necessarily imply profitable or efficient growth
* We could either not be growing fast or be spending an inefficient amount of S&M dollars to achieve ARR growth
* Metric can highlight opportunity to address downsell and churn ARR catalysts - i.e., improve the product, do more customer support, etc. to limit weighing down new logo and expansion ARR

Calculation Specifics:
* Can be calculated quarterly or annually