In the SaaS world, we love our numbers. From ARR to CAC and CARR, metrics are crucial to help define success and measure the health of subscription businesses.
Some of the metrics are more valuable than others, though—and the benefit of focusing on any given subscription metric requires two things:
- It measures something meaningful for your specific business
- It offers a way to contextualize what good or bad performance looks like
According to Kristina Shen, there’s one really popular subscription metric that fails that test. As General Partner at Andreessen Horowitz, she’s seen inside her fair share of SaaS businesses and knows a thing or two about the subscription metrics that really matter.
We sat down with Kristina to find out which subscription metric she considers the most incorrectly used. (You can watch the entire interview right here)
The most incorrectly used subscription metric
Without further ado: the most incorrectly used subscription metric is—drumroll please—net dollar retention.
There’s no baseline for what “good” retention looks like
Unlike many other subscription and business metrics, there’s just no way to benchmark net dollar retention across businesses. For example: a direct sales company will have radically different retention numbers than a self-service or product-led business. It’s not even a reasonable comparison.
“Good” retention varies a ton based on customer segments and deal sizes, too. For example, if you’re selling small deals—say, $12k ACV—to SMBs, your net dollar retention is always going to be on the lower end. Maybe 70–75% is great for your business.
But on the other end, when you’re selling $50k or $100k deals to mid-market and enterprise companies, ”you gotta be 90% retention or higher.”
In Kristina’s view, that variation causes a lot of misunderstanding around what good retention really looks like in the wild.
It depends on your business model and who your customers are
Now, retention numbers can be useful if you first benchmark them against other businesses with a similar go-to-market, selling into the same customer segment.
But most SaaS leaders aren’t doing that. That’s why Kristina believes both retention broadly and net dollar retention, more specifically, are “massively misquoted and misused, and actually misdefined, all the time.”
How to solve for net dollar retention when it’s hard to benchmark
Despite the difficulty net dollar retention poses when it comes to benchmarking, it is an important metric.
So how do you approach a metric that’s hard to benchmark but vital for the growth of your company? According to Kristina, it’s all about focusing on trend lines instead of hard numbers.
The first step is to start measuring retention right now, so you can track trends over time and have as much historical data to compare as possible.
Once you have a regular pulse on what your net dollar retention looks like, you’ll be better prepared to zero in on patterns, unexpected changes, and what “good retention” means for your business.
From there, you can use net dollar retention to help inform strategy and goal-setting across other metrics.
For example, high net dollar retention correlates with high lifetime value (LTV) so you can likely afford to spend a little more upfront to acquire customers.
Find your superpower metric
Kristina also recommends subscription businesses find their superpower metric and focus in on that, too.
Think about it like this: even the darlings of SaaS don’t look great on every subscription metric—they have one metric or component that really stands above the crowd. And that’s what powers their growth.
Take Slack for example: their superpower is early engagement and a great viral coefficient—people bring on their friends and the product grows from there.
That isn’t a standard metric people typically look for. But it is the key to Slack’s success, meaning they have to focus on it in order to grow.
As Kristina put it, “By definition benchmarks are average. You have to figure out for your company, for your business, what is that superpower that makes you really, really stand out?”
Subscript can help
Subscript keeps all your data in one easily accessible, user-friendly interface, helping you run a tight ship with metrics without the hassle of spreadsheets.
Want to learn more? Request a demo here.
Want to watch the entire interview with Kristina?
You can watch the episode right here.