Upsells are critical to growth in SaaS
Net dollar retention is the most important metric in SaaS. If you’re over 100%, revenue from upsells is outpacing revenue you’re losing from downgrades and churn. It means you’re keeping the customer base forever, and your current customers are a major source of growth. The latter is a wonderful bonus that isn’t well understood and based on our math, upsells may account for the bulk of SaaS revenue in some cases.
For clarity, net dollar retention is beginning of period revenue + upsells -churn – downgrades all divided by beginning of period revenue (BEG + UPGRADES – CHURN – DOWNGRADES / BEG). The most common measure of a period is 1 year. As the data shows, when most SaaS companies go public, their net dollar retention is 108%.
So, how can upsells make up a material level of new revenue for many SaaS companies? While net dollar retention may be 108% on median, gross retention (just BEG – CHURN – DOWNGRADES / BEG) is typically between 80% and 95% for most SaaS companies. In other words, companies are losing 5% to 20% of their revenue from current customers, so if net dollar retention is 108%, that means upsells were 13% to 28% of original revenue. The table below illustrates the math and shows that in most cases upsells are a very material of new revenue.
Even if a SaaS business is growing 60% year over year, if that business is at the median of 108% net retention, then $1 out of every $3 of new revenue was an upsell. It’s material.
Hopefully the above drives home how important it is to upsell your current accounts. Make sure your customer success reps are focused on retention only, while account executives are tasked with reaching out to current customers and driving upsells.
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