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www.saas-capital.com RETENTION PAGE 1 In Q1 of each year, SaaS Capital conducts a survey of B2B SaaS company metrics. This year’s study marked our 8th annual survey and it continues to grow year-over-year with over 1,100 private B2B SaaS companies responding, making it the largest survey of its kind. Below are our findings on retention. Future research briefs will cover growth rate, channel partnerships, departmental spending and a new area of questioning this year: employee stock option plans. 2019 B2B SAAS RETENTION BENCHMARKS Because of its compounding effect on growth, revenue retention is now well established as the most important metric for ensuring medium- to long-term business health. New sale bookings versus revenue retention is the SaaS version of “offense wins games, defense wins championships.” Because of its importance, we publish a lot of research on retention rates, and below is our most recent survey data cross-referenced against other important figures like growth rate, funding and spending. First, definitions. We asked companies to report their net and gross annual revenue retention data. Customer account retention may be a useful metric for you to track, but our focus in the survey, and generally the retention metric we think the most important, is based on dollars of revenue. We define net retention as: (Monthly Recurring Revenue in “June of 2019” only from customers who were customers in “June 2018”) ÷ (Total MRR in June 2018) This number can be anything from 0% to well above 100%, as it includes up-sells, new product cross-sells and price increases. Annual gross retention is the same formula, excluding the upsells, cross-sells and price increases. (For easy calculation, set each customer’s 2019 MRR to be less than or equal to their 2018 MRR.) For this reason, gross retention cannot exceed 100%. Retention by AnnuAl ContRACt VAlue The chart to the right shows median net and gross revenue retention across a range of annual contract values (ACVs). For retention, benchmarking by ACV is the best starting point. More than by company age, revenue level, or industry, companies that share a similar selling price have the most in common. They will be organized similarly, go to market similarly, and support customers similarly. The opposite is true of two companies selling a $19.99/month product versus a $250,000/year product. Two obvious trends emerge in the data below. The first is that higher gross retention is directly correlated with higher ACVs. Our annual survey data has consistently shown this relationship over the years. It is an intuitive relationship in that higher-priced solutions more often involve a longer sales cycle, in-depth scoping and implementation, and dedicated support and account management. High ACV products also frequently require multi-year agreements. Lower ACV software is more commonly self-serve with minimal training, RESEARCH BRIEF 19: RETENTION 80 85 90 95 100 105 < $6,000 $6k - $12k $12k - $25k $25k - $50k $50k - $100k $100k - $250k >$250k Median Annual Reten�on PercentageAnnual Contract Value Net Revenue Reten�on Gross Revenue Reten�on SaaS Capital www.saas-capital.com RETENTION PAGE 2 onboarding, or support. Many lower ACV products are also targeted toward smaller-end customers that have a higher natural churn rate because they go out of business more frequently. This concept of a gross retention “ceiling” due to market or customer characteristics comes up several more times below in this research brief and is something we plan to study further. The second trend is that, aside from the very small ACV segment, net retention is fairly consistent across all ACVs. This is interesting because despite having lower gross retention, lower ACV product companies are apparently finding more ways than their higher ACV counterparts to upsell and cross-sell into their customer base. The lower gross but higher net retention companies are on equal footing in the ‘compounding effect of churn’ formula, however, they likely spend more sales and marketing recourses to achieve the same outcome. These trends are consistent with previous years’ surveys: the median net revenue retention across all companies is 100%, and gross retention remained at about 90%. Retention And GRowth RAte The chart below shows the relationship between median net and gross revenue retention and growth rate for companies with at least $1 million in ARR (we excluded the small companies because of their highly erratic growth rates). Higher growth and higher retention are directly correlated and create a positive feedback loop due to the compounding nature of retention. This relates to the “leaky bucket” phenomenon. The higher your retention, the easier it is to grow that much faster because you don’t have to first refill the bucket before adding to it, and that scenario repeats and expands on itself year after year. The opposite is also true. Companies growing between 10% and 50% all share net retention rates near 100%. Net retention of 100% appears to be table stakes for a successful, growing company but retention alone doesn’t explain the difference between a 10% growth company and a 50% growth company. For a company to grow faster than 50%, however, retention above 100% is required. Strong new bookings are not enough to propel a company into high-growth status, it must also effectively and increasingly upsell into the customer base or have a product that scales up with each customer. Gross retention does not share as strong of a relationship with growth rates as net retention. The median gross retention rate for slow or no growth businesses in the survey was 89%, while it was 91% for all other businesses growing at least 10%. So, similar to net retention, gross retention needs to be at a stable and sufficient level, but above that, it is not the main determinant of growth. Retention And ChAnnel SAleS Channel sales has been an area of increasing interest for the SaaS model over the last few years, and we are frequently asked about the impact of a channel sales strategy on retention. First, there is no difference in net or gross retention between companies that have a channel program and those that do not. Both groups report 100 net and 90 gross retention. However, both net and gross retention are lower for companies who receive the majority of total revenue through a channel partner versus those that sell mostly directly: 101 net and 87 gross for the latter and 97 net and 84 for the former. That said, while the number of companies that run a channel program versus those that 80 85 90 95 100 105 Median Annual Reten�on PercentageAnnual Revenue Growth Rate Net Reten�on Gross Reten�on SaaS Capital 80.0 85.0 90.0 95.0 100.0 105.0 Value-added reseller So�ware company Consul�ng firm Complementary non-so�ware company Annual Reten�on PercentageChannel Partner Type Net Reten�on SaaS Capital www.saas-capital.com RETENTION PAGE 3 do not is about 50/50, only about 10% of companies that have a channel program receive a majority of revenue from it. Selling strategy does not appear to impact retention. There is no clear relationship between retention and whether the channel partner provides a simple introduction between the customer and SaaS company, or the customer is jointly sold by the partner and SaaS company, or if the sale is 100% managed by the partner. It also doesn’t appear to matter with whom you partner with, except for upsell potential through a non-software provider. In the chart above, the biggest difference among the different potential partner types is lower net retention when partnering with complementary non-software companies. Retention foR hoRizontAl VS. VeRtiCAl SolutionS Two interesting points emerge when we segment by whether a company sells a vertical focused product (dental office management software) versus a horizontal product (applicant tracking). Gross retention for horizontal-focused companies is weaker, by 5 percent, than that of their vertical peers. Interestingly, however, net retention is close to equal between vertical and horizontal companies, 99 versus 101. Retention in VC-bACked VS. bootStRApped CompAnieS How do bootstrapped companies compare to venture capital-backed companies? Both net and gross retention are 4 percentage points higher for venture-backed companies. Peeling back the data another layer, a much higher percentage of VC-backed companies have a customer success (CS) lead reporting to the CEO earlier in their life than their bootstrapped peers. At about year 7 or 8, bootstrapped companies have caught up, with about 61% of both groups having a VP of CS at that point. VC-backed companies also outspend bootstrapped companies on customer success by about 20% in their early years, but again, by about year 7 or 8, both groups are spending about the same: 10% of revenue. Despite eventually reaching parity with the VC-backed companies on the investment in CS, bootstrapped companies don’t ever close the churn gap with their VC- backed counterparts. Instead, bootstrapped companies in their early years have retention about 4 percent lower than their VC-backed peers, and it remains about that much lower through time. ConCluSionS And tAkeAwAyS • Across all SaaS companies, net retention is 100% and gross retention is 90%. • Gross retention is higher for higher-ACV products. • Gross churn is not correlated with growth rate, but net churn is. • Companies selling a vertical product have higher gross retention (89%) than companies selling a horizontal product (83%). Net retention is about the same for the two groups (99%). • Companies that receive more than 50% of total revenue through a channel partnership have lower retention than their peers. • Venture-backed companies have higher gross and net retention than bootstrapped companies, by 4 percentage points. • Something not discussed above, but that we are asked frequently, is whether payment frequency (annual up-front versus monthly) impacts retention. The data show virtually no difference in retention rates between companies that receive customer payments primarily on a monthly basis versus those that predominately take annual up-front payments (100% net and 90% gross for both). “The biggest difference among the different potential partner types is lower net retention when partnering with complementary non-software companies. ” www.saas-capital.com RETENTION PAGE 4 ABOUT SAAS CAPITAL SaaS Capital is the leading provider of growth debt specifically designed for SaaS companies. Focusing exclusively on the SaaS business model, SaaS Capital delivers faster decisions, more capital, and longer commitments. SaaS businesses have used SaaS Capital instead of equity to finance growth and create hundreds of millions of dollars in enterprise value without sacrificing significant ownership or control. SaaS Capital has offices in Cincinnati and Seattle. Visit www.saas-capital.com to learn more. 1311 VINE STREET | CINCINNATI, OH, 45202 7900 E GREENLAKE DRIVE NE, SUITE 206 | SEATTLE, WA 98103 IWWW.SAAS-CAPITAL.COM TODD GARDNER | FOUNDER AND MANAGING DIRECTOR | TGARDNER@SAAS-CAPITAL.COM | 513-368-4814 ROB BELCHER | MANAGING DIRECTOR | RBELCHER@SAAS-CAPITAL.COM | 303-870-9529
