Translating the metric your CEO cares about most
Why they’re so relentless about retention that they’ll rearrange the roadmap
👋Hi, it’s Greg and Taylor. Welcome to our newsletter on everything you wish your CEO told you about how to get ahead.
When I was at L2, our founder/CEO Scott Galloway spent at least one all hands a month discussing NDR (Net Dollar Retention).
He was relentlessly focused on this metric, which meant the rest of the organization was relentlessly focused on it. We tracked NDR obsessively and were constantly testing and piloting new products to grow our best accounts.
Sometimes, this was frustrating, especially when we’d sell products or services we didn’t have yet to retain a large account – and then have to shift other priorities (or just work more) to deliver.
But over time, the way Scott explained NDR helped these decisions make sense. Strong NDR not only made annual growth easier; it was also a signal to investors about the value of the company – so investments in increasing NDR (like working over time to deliver a feature a large client needed) paid out in the long run.
To become a leader in your organization, you need to be able to understand metrics like NDR and how they shape priorities and drive behaviors in your org. Here’s why NDR matters so much and how you can help your CEO meet it.
– Taylor
The terms to know
There are two ways to measure retention: logo retention (the percentage of your accounts that renew their contracts) and net dollar retention aka NDR (the percentage of revenue renewed by those accounts).
The general rule of thumb is that great logo retention is 80% and great dollar retention is 120%. These are the targets Scott focused on 10 years ago at L2, and they’re still the best-in-class benchmarks in enterprise SaaS today.
Let’s say you have 100 accounts accounting for $10 million in revenue. 80% logo retention means that 80 of those accounts renew next year. 120% dollar retention means that those 80 renewing accounts spend $12 million the next year (120% of $10 million). This is possible because some of the accounts that renew will do so at a higher contract value.
Both metrics matter for a healthy business. If your logo retention is low but your dollar retention is high, you’re dependent on a few clients who have a lot of power over you because you’ll do anything to keep them happy.
The alternate scenario (low dollar retention and high logo retention) means your accounts aren’t growing – they may even be renewing at a lower rate year over year – which lowers your customer lifetime value and makes it harder for the business to grow capital-efficiently.
Both scenarios imply a lack of product-market fit, or a smaller market than you originally thought – both of which impact revenue multiples and valuation.
Why it matters to your CEO so much
There are two reasons your CEO is so focused on NDR:
It matters to investors. NDR is the metric the industry uses to benchmark recurring revenue businesses. The lower your NDR, the lower your multiples, the lower the profits for investors. Without good NDR, your capital sources begin to dry up.
It encompasses their key directives. Two of the CEO’s main focus areas are on creating enterprise value and managing cash. NDR is a health meter for how well your product fits enterprise needs and how reliable your cash infusions are.
Think of this metric as your pulse oximeter. Investor capital is the oxygen that keeps the blood pumping and good NDR keeps the capital coming in. When these are at a healthy ratio, things work well. But the lower your NDR, the less capital you’re going to get – eventually your business is starved of oxygen.
That’s why your CEO cares so much about demonstrating NDR – enough to inconvenience the team a little bit.
The behaviors it translates into
To protect or improve NDR, your CEO and leadership team may resort to all kinds of funky behavior:
Make changes to the product roadmap to satisfy one or a few clients. This isn’t scalable in the long term, but often your CEO will greenlight a new feature for a client that could significantly improve NDR, especially if they think that feature might catch on with other clients as well.
Sell ahead of the roadmap. In non CEO-speak, this means selling things that don’t yet work or even exist. You might be on a call where your CEO promises a feature you don’t have yet (or haven’t even heard of). They’re not out of touch – they’re likely trying to save or grow the account, or figure out if it would save or grow the account, knowing you can find a way to build the feature down the road.
“Let’s make a deal” conversations become common, as previously inflexible pricing and terms suddenly get flexible. Your CEO could be offering something totally antithetical to what has already been decided on – they know that.
Knowing the why behind these seemingly on-the-fly actions will not only help with short-term frustration, it will also allow you to align your thinking with the CEO’s strategy.
Adding new revenue from current customers is ultimately cheaper than trying to source and sign new ones, because you don’t have to dedicate marketing spend to it. So diverting internal resources to retain an existing client is better for the business, even if it’s more annoying for the team in the moment.
This is the unlock that makes you a good thought partner.
How to be seen as a leader on NDR
Leaders want to work with others that understand key drivers of their business (like NDR) and know how to influence those metrics. This way, they spend less time translating for you and more time strategizing with you. So you need to not only understand how NDR works, but be able to hold and understand how that metric informs the business’s focus areas.
Here’s how you can get closer to speaking the language of your business:
Dig into the current strategy. Ask your boss or sales leader: How are we thinking about our NDR right now? What’s our current NDR and how does that compare to our goals? Which is more of a priority, increasing dollar retention or logo retention? Then think about how your work can impact this focus area.
Ask your enterprise team how you can help. Have regular conversations with your head of sales or customer success. Understand which accounts are most at-risk, which need saving, and how you can help – even if you never work with that client directly.
Our advice
Every company has key metrics that drive the business. Some are unique to that company, but many are industry benchmarks – like NDR. Your responsibility is to understand those metrics, not wait for someone to teach them to you. And understanding doesn’t stop at definitions.
You should know what they mean AND understand how they drive priorities and behavior.
You should know what they look like in an ideal world (120% NDR is expected in a growth economy) AND understand that it can change over time based on the bigger context (in a recessionary economy 100% NDR can be considered success).
Leaders use business jargon and metrics as a short-hand. Being able to jump into these conversations is like having the velvet rope unhooked for you. Don’t let it intimidate or confuse you – take the initiative to learn and influence these metrics.
To the next 10 years,
Greg & Taylor
Great piece. Nicely explained. I really enjoy your newsletter. Keep it up.