Why is a company's dollar-based net retention rate, or DBNRR, important?
Because DBNRR is one measure of a company's ability to retain its customers and, thus, its revenue. For a business to grow successfully, it not only needs to attract new customers but retain existing ones and grow the revenue received from those customers.
Understanding DBNRR
A company's dollar-based net retention rate takes all the customers at a certain point in time and tracks how much of their business the company still has after a specific period.
DBNRR is particularly relevant to software and technology companies that operate via a subscription model. These are referred to as software-as-a-service (SaaS) companies. They look to onboard new customers and increase the revenue received from new and existing customers over time. This can occur by selling additional products or services or increasing the usage of a company's products and services within customers' businesses.
Customer churn (where customers cease using a business) can be measured by comparing customer numbers across different time periods. But this doesn't tell us about the impact of customer churn on revenues.
This is where the dollar-based net retention rate can assist. DBNRR indicates how increased revenue from existing customers can offset revenues lost from customers who have exited the business. Leading software companies generally expect to have dollar-based net retention rates of 110% or higher.
How do you calculate it?
Dollar-based net retention rates are calculated by comparing revenue generated from existing customers at the start of a period with revenue generated from those same customers at the end.
Let's look at an example:
| Customer | Revenue start of period | Revenue end of period (scenario 1) | Revenue end of period (scenario 2) |
| A | $2,000 | $3,000 | $3,000 |
| B | $3,000 | $5,000 | $5,000 |
| C | $4,000 | $0 (exited) | $0 (exited) |
| D | $5,000 | $6,000 | $6,500 |
At the start of the period, the company was generating $14,000 in revenue from customers A, B, C, and D. Customer C ceased being a customer during the calculation period, while customers A, B, and D varied their spending.
In scenario 1, the company is generating revenue of $14,000 from its customers at the end of the period. This means DBNRR is 100%. In scenario 2, the company is generating $15,000 in revenue from its customers at the end of the period. This gives a DBNRR of 120%.
In the above scenarios, customer churn is 25% because one in four customers ceased using the business. But customer churn is not captured in DBNRR. This means DBNRR should not be used in isolation. It should be considered alongside other metrics, such as customer churn and revenue growth rates.
The dollar-based net retention rate tracks how much of the customers' business a company still has after a specific time. Some customers might be paying more, others might be paying less, and others might have left altogether. But looking at them in the aggregate tells us how well a company keeps its customers and how well it makes up for losses.
When do you use the metric?
DBNRR is particularly useful for technology companies operating on a SaaS model. They can grow revenue by adding new customers or by increasing sales to existing customers. Many SaaS companies aim to 'land and expand' — that is, land new customers and expand the offerings used by those customers over time.
Because it is generally more cost-efficient to increase sales to existing customers than win new ones, SaaS companies need to expand sales to their existing customer base. If they can do so, it indicates that customers are happy with the service and are increasing their use of the SaaS company's products as a result.
DBNRR is a useful metric for assessing how a company's customers change their usage of products and services over a given period.
How does it compare to DBNER?
A company's dollar-based net retention rate differs from its dollar-based net expansion rate (DBNER).
While the DBNRR examines the entire customer cohort over time, the DBNER looks at a certain segment of customers. Both provide helpful insights to measure how well a SaaS business is doing and their level of customer engagement, but there are crucial differences. Where DBNRR measures the percentage of revenue retained over a period, DBNER measures how well a company 'expands' sales to customers that it 'lands'.
When using these metrics, it is important to understand how individual companies calculate them to ensure you compare like with like. Some companies have been known to use the DBNRR and DBNER interchangeably, so you must review any disclosures in company filings to ensure you understand exactly what is being measured.
Why is DBNRR so powerful for businesses?
As customers expand their usage of a company's products or services, the lifetime value of each customer grows. Because SaaS companies operate on a subscription model, a high DBNRR should translate into growth in recurring revenue.
More certainty
Recurring revenue is the portion of a company's revenue that it expects to continue in the future. Companies generate recurring revenues by providing ongoing access to their products or services in exchange for regular payments. Recurring revenues are more predictable and stable than one-off sales, meaning companies can expect recurring revenues to be received regularly with a high degree of certainty.
Higher valuations
Recurring revenue, combined with fast rates of growth, are the reasons why many SaaS companies have relatively high valuations. SaaS companies are frequently valued based on multiples of recurring revenue. This differs from methods used to value traditional companies, such as comparing past sales of similar companies or using the discounted cash flow (DCF) method to arrive at a present value.
More predictable earnings
Because SaaS companies charge customers regular subscription or recurring fees, their earnings are more predictable. They can also generate significant revenues if they keep customers for a long time. Additionally, as the SaaS model becomes more widely accepted, many SaaS companies are recording high growth rates.
Lifetime customer value
SaaS companies do not charge the hefty upfront fees of traditional software sales models. However, the lifetime value of SaaS customers is often greater, provided the SaaS companies can keep their customers on board.
Scalability
Long-term contracts with happy customers reduce earnings volatility, leading to higher valuations. SaaS companies also benefit from their scalability. As the use of cloud-based applications grows, these companies can attract a bigger slice of an increasingly large market. Additionally, SaaS companies often offer proprietary technology and own unique intellectual property, increasing their valuations.
Performance insights
The dollar-based net retention rate can provide crucial insights into how well a company keeps its customers and how well it makes up for customer losses. If the DBNRR is above 100%, increases in revenue from customers who stay over the period make up for lost revenues from customers who have exited the business. This is a positive sign but certainly not the only measure to consider when assessing if a company is a worthy investment.
Combined with additional information, however, dollar-based net retention rates can provide valuable insights into a company's performance.
