Retention: A Deep Dive for Founders

Retention: A Deep Dive for Founders

It’s no secret that metrics are key in SaaS, and for us no metrics are more important than customer retention and acquisition measures.  Why?  In short, we’re a holding company focused on the long-term and we need to know that customers rely on the companies we buy - year-in and year-out.  We also want to know that more growth is possible, and that customers today are still choosing our companies over other options.  

For this edition of the newsletter, we wanted to give you a full view of the three key retention metrics we look at, why they are important, and what they say about what more might be possible for these businesses - especially when combined with a simple sales metric.  It’s a bit of a deep dive - and a lot of SaaS folks out there may already know these terms - but they are really important and we wanted to share a few case studies (anonymized examples) at the end to share what narrative the numbers tell about a company.

The more important retention metrics we review are gross dollar retention, net dollar retention, and logo retention. Of course we prefer each of these pieces to be strong on their own, but the differences can tell a larger story behind the positioning of the company and what more might be possible under our ownership. Beyond factoring into a potential exit valuation, we think understanding a buyers’ view of retention can inform how founders think about ways to improve their business today.

So how are each of these three retention metrics measured and what important insights can they offer?

Gross Dollar Retention

Gross dollar retention is the most essential retention metric we look at. It evaluates the change in revenue solely from existing customers without factoring in any upsell in order to take a distinct look at churn and downsell (in how we calculate it - others may differ). To calculate gross dollar retention, you will take the sum of revenue from all existing customers at the end of a given period, excluding any upsell/expansion, divided by the revenue from only those same customers at the start of the next period. (Usually gross dollar retention is abbreviated GDR.)

What’s our minimum?  80% on an annual basis - and higher is clearly better.  Aren’t there great, growing businesses with higher churn / lower retention?  Yes, of course - but for a holding company, our view is that gross retention under 80% means the product-market fit doesn’t have the staying power we want to see for our ownership model.

Often if gross dollar retention is on the lower end of our spectrum, a company may have not yet established an ideal customer profile so customers really are just trialing the software, not committing to it.  Sometimes that can be necessary in an early, high growth phase - especially for product led growth SaaS - but it still makes us uncomfortable with our ownership model. In our experience - and we’ve seen a lot of businesses raise retention over time - the combination of better ICP / tighter marketing focus and product + customer happiness improvements can raise gross dollar retention significantly.

Net Dollar Retention

Net retention is similar to gross dollar retention, except it factors in all churn, downsell, upsell and cross-sell within the existing customer base. You can calculate net dollar retention by summing up the revenue from all customers at the end of the period and subtract any revenue lost from churned customers. Then, add any additional revenue generated from upsell and cross-sell to existing customers during that same period. Finally, divide this total by the revenue from existing customers at the start of the period. (Usually, net dollar retention, a.k.a., net revenue retention, is abbreviated NRR.)

The end product is a metric that not only tells us how well a company is retaining existing revenue, but also their ability to grow revenue within its existing customer base excluding new customers. While our version of gross dollar retention looks specifically at churn, net dollar retention can now indicate how customers scale and average revenue per customer might rise over time. 

What’s great NRR?  We (and most SaaS buyers) love to see NRR above 100% - or we see a path to above 100%.  Usually NRR above 120% indicates a super high growth period that might make the company a good fit with venture capital or other growth capital.  That said, we often believe we can improve NRR by helping teams at our companies improve and build out upsell and cross sell motions and product enhancements.

Logo Retention

Logo retention is the simplest view of churn, and only factors in whether customers renew - not how much they spend when they renew. Logo retention takes total beginning of period logos (customers) minus churned logos, and divides this value by total beginning of period logos. What’s a good number?  For us, the floor isn’t as hard as for gross dollar retention, but we really like to see 90% of customers coming back year after year.  

New Logos: Any Important Framing Metric for Retention

Last, it’s critical to see how many new customers (logos) a company is adding.  It’s actually not that uncommon to see companies with very solid retention metrics - but few or even no new customers.  That indicates that future growth will very likely slow as the ability to cross sell and upsell (a.k.a. raise prices) may well hit a ceiling.  And without new customers in the mix, it can get really hard to keep growing.  Very slow new logo acquisition might mean a tough mature market, broken GTM motions - but might also mean opportunity if we think a new marketing mix or product approach can appeal to new customers.  

A Few Helpful Follow Up Questions When Metrics are Lacking

Look, we know running a SaaS business is really hard.  Just because the metrics may be a bit short, follow up questions can help drive improvement.  Here are a few good ones we’ve seen and heard about from our operators and founders we talk to:

  • Is logo retention improving over time (as companies better know their ideal customer profile (a.k.a. ICP)?

  • Is logo retention different by customer segment?  This can tell you a lot about where to take your business next?

  • If you have a complex product offer, what does retention by product look like? 

  • What has happened to retention when the economy struggles?  (For example, many software companies found out if their solutions were must-haves or nice-to-haves when Covid hit and in the downturns of 2001 and 2009.)?

Case Studies - Our POV on a few typical examples and possible unlock

#1 - 85% GDR, 85% logo, 85% NRR, +10% new logos - Indicates a mature market with a simple, one-size-fits all pricing strategy but customers like the product pretty well - including new customers. There may be more value to unlock with an updating of the product / pricing strategy to unlock upsell and cross-sell and push net retention over 100%.

#2 - 65% GDR, 80% logo, 100% NRR, + 50% new logos - indicates a higher growth, newer market with significant land-and-expand possibilities but (perhaps) lack of clarity on the ICP today as the company races to grow.  There may be more value to unlock with more focus on selling to and onboarding only the customers likely to stick - and expand.  This kind of business might turn into a huge growth story - as long as the lower gross dollar and logo retention numbers don’t indicate product weaknesses that customers expose after they buy.

#3 - 75% GDR, 80% logo, 105% NRR, + 2% new logos - indicates the business may look pretty healthy in the P and L but slow growth of new logos is being masked by huge upsell and cross sell to a few customers.  There is a very real danger that the business will start to decline quickly because upselling and crossing if filling the gap from churn - for now - but there aren’t new customers (logos) showing up to fill it in future.

Summary and Call to Action

We hope this deep dive into jargon has made these critical metrics more understandable - and might have given you some ideas of areas you could improve your business.  Feel free to reach out to us if you want to seek our take on anything you’re wondering about or struggling with on customer retention. 


We’ve put together a must-do exercise for Founders - Annual Exit Planning. This workbook will walk you through the various steps and questions you need to answer and document in order to get better prepared to sell your business. Grab the file, find some time work through it, and get in touch if we can help you think through any of the components along the way!

THE PLAYLIST (What We're Watching, Reading, and Listening to)

  • Paddle's SaaS Market Report - B2B growth and sales are picking up in early 2024 with MRR increasing in February +7.4% on avg y/y among the companies using their platform

  • Top 50 Technology Investors - Big Band's own Chris Reedy was recognized as a top investor by Axial, the leading online middle market acquisition marketplace

  • Resilience matters in success - Nvidia's CEO Jensen Huang discusses the juxtaposition of high levels of resilience vs. high expectations and how greatness is born out of suffering  

Join The Band

We’re building our database with the best leaders and operators out there. If you know exceptionally talented people that may one day want to work with us, please have them get in touch with us at [email protected] or fill out the form on our Connect page.

Was this newsletter forwarded to you? If so, subscribe by clicking the button below and follow along with our journey!