In the ever-evolving landscape of the Software-as-a-Service (SaaS) industry, predicting the future success of a company and achieving the perfect product-market fit has always been a challenging pursuit. While numerous metrics have attempted to capture the essence of this elusive success, one particular metric stands out – a metric so powerful that it's currently nameless (We see you Voldemort…He-Who-Must-Not-Be-Named). In this blog, we'll delve into the intricacies of this groundbreaking metric, explore its potential, and collectively brainstorm a fitting name that encapsulates its essence.
The Challenges with Traditional SaaS Metrics
Traditional metrics often fall short when it comes to predicting the future performance of SaaS companies. Two key problems come to the forefront:
Problem 1: The largest customers determine the result
Metrics like Net Dollar Retention and Gross Dollar Retention can sometimes be skewed by a few influential customers. A high retention rate might be driven by one massive customer's upsell, which doesn't necessarily reflect the repeatability essential for SaaS success. Gross Dollar Retention, too, can be influenced by the largest customers, distorting the true picture.
For these reasons Gross Logo Retention has always been the purest metric. The problem we are seeing now though is the very definition of logo has become subjective particularly in this new usage based world.
Examples:
You sign up a $100k ARR deal. It renews at $5k. In logo retention that is 100% even though this is not a success.
In usage based pricing, let’s say the customer has been paying about $1k per month for 12 months, but then is not active in a month and pays $0. Are they still a customer?
Problem 2: The second major issue is when calculating retention a majority of the customers in the calculation are not “Up For Renewal”.
A majority of the calculation is driven by customers under contract that can’t churn.
Example: A customer has been with you for 3 years paying $12k per year in an annual contract. They are up for renewal in January 2024. When you calculate your Gross $ Retention for July 2023, they will show up $12k in the numerator and $12k in the denominator even though they didn’t have to make any decision in that period.
The Quest for the Most Predictive Metric
Amidst these challenges, a new metric emerges – one that has the chance to be the best when it comes to predictions and meaningful insights. Let's break down this metric step by step:
Renewal Decision Focus: The new metric focuses solely on customers who have to make a renewal decision within a specific timeframe. This sharpens the predictive power by considering only those customers who are actively deciding whether to continue their subscription. It is not being altered by averaging in a bunch of 100%.
Example: Assume 4 customers have to make a renewal decision in July 2023
Each customer is equal: For each customer in the designated period, the percentage of their current subscription price that they choose to renew at is calculated. These individual percentages are then summed across all customers in the calculation.
Example:
Customer 1: If paying $1M and decide to renew at $100k that is 0.1
Customer 2: If paying $50k and decide to renew at $50k that is 1.0.
Customer 3: If paying $50k and decide to renew at $100k that is 2.0
Customer 4: If paying $25k and decide to not renew that is 0.0.
Calculation: The final metric value is obtained by dividing the sum of renewal percentages by the total number of customers with renewal decisions.
Example: (0.1 + 1.0 + 2.0 + 0.0)/4.0 = 78%
Interpretation: This figure provides a clear insight into the average percentage of the current subscription price that customers choose to renew at. You can apply this to all customers to get a better forecast.
Example: This tells me if you sign up a new customer today, they on average pay 78% of their current license at time of renewal.
Resolving the Challenges, Embracing the Meaning
This novel metric effectively addresses the challenges of traditional measurements by focusing on renewal decision points, reducing the influence of outliers, still is impacted by paying more/less at time of renewal, and most importantly has actual meaning you can apply to your existing customer base in forecasting.
The beauty of this metric lies in its practicality, offering a tangible perspective for forecasting and strategic decision-making.
Introducing the Unnamed Metric: A Call for Collaboration
We call this metric internally what it is doing, but it is too wordy…..
"Up For Renewal Net Retention (Rescaled)"
There has to be a better name :)
What should we call it???????