Pricing Strategy Insights & Research | GTM Pricing Innovations

“What is measured get managed.”

We all know this old saying, usually attributed to management philosopher Peter Drucker. Do you manage the performance of your SaaS packages?

One of the critical metrics to measure is Net Dollar Retention (NDR) also known as Net Revenue Retention (NRR). Investors are putting more and more pressure on SaaS companies to measure and grow NDR. You need to know the factors that determine NDR, set targets for each factor, measure actual performance and then have a plan for improvement.

We have explored expectations around NDR with our VC and PE partners (Ibbaka works with a number of VC and private equity companies to help their portfolio companies grow through optimized pricing) and done some additional polling work. Here are the targets we are seeing for NDR in early Q2 2023.

Most of the companies surveyed had a target (23% did not, of course companies without a target were less likely to respond, the actual percentage of companies without a target is likely much higher) and very few companies were targeting NDR of less than 100% (but this would have changed if the question was about projections and not targets).

Just over 40% of companies responding had NDR targets in the green zone. This seems reasonably optimistic, especially given the current headwinds the SaaS market is experiencing. So we asked a follow up question.

Do you expect to achieve your NDR target this year?

Hmmm, not so optimistic. We also asked a number of VCs about their NDR expectations.

The target ranges depend a lot on the category, where the company and category are in the technology adoption cycle, and past trends, but there seemed to be a general consensus around these ranges.

What do SaaS businesses need to do to achieve their NDR targets and get into the green zone?

There are six factors that impact NDR expansion or contraction.

Three positive NDR factors

Grow in package

Upsell to packages with a higher contract value

Cross sell to adjacent solutions

Three negative NDR factors

Shrink in package

Downsell to packages with a lower contract value

Account churn

These are often summed in the NDR waterfall.

In follow up posts we will look at the specific tactics that can be used to impact each of the six factors.

For a three tier, Good-Better-Best packaging, the six NDR factors are determined by fourteen transitions. (The number of transitions increases the more packages you have.)

The six positive transitions

Growth in the Good package

Growth in the Better package

Growth in the Best package

Upsell from Good to Better

Upsell from Better to Best

Cross sell to other products

The eight negative transitions

Shrinkage in the Good package

Shrinkage in the Better package

Shrinkage in the Best package

Down sell from Best to Better

Down sell from Better to Good

Account churn from Good

Account churn from Better

Account churn from Best

To manage NDR effectively, you need make assumptions (projections) for each of the six NDR factors and then plan actions to make sure that the six positive transitions overwhelm the eight negative transitions.

That is a lot of modelling and tracking. To help you do this, Ibbaka has created a simple NDR checklist for you.

In subsequent posts, we will go into the tactics you can take for each of the six levers.

NDR growth tactics 1: Grow in Package

NDR growth tactics 2: Drive Upsell

NDR growth tactics 3: Promote Cross Sell

NDR growth tactics 4: Avoid Package Shrinkage

NDR growth tactics 5: Discourage Downsell

NDR growth tactics 6: Reduce Churn

Prioritizing NDR growth choices

Pricing and NRR: The PeakSpan Ibbaka NRR Survey Results

Pricing and NRR: The 6 Factors to Manage

Pricing and NRR: What are the key questions?

Prioritizing NDR growth choices