Why NDR is a bad startup metric.

[ 432 words; 3 min read ]

One of the leading SaaS VC, Tom Tunguz, recently wrote about Net Dollar Retention Rate (NDR). His article very neatly described Simpson’s paradox and the challenges in measuring NDR effectively (You can read Tom’s post here).

Now, I don’t know Tom and I hope he doesn’t mind me using his first name. And, I am not really in a position to question anything he writes but, I found myself disagreeing with one of the leading lights of SaaS!

Let me explain. In his post, Tom also stated that NDR was one of the most important metrics in a SaaS business. And, whilst this may be true for a VC I am really not quite so sure it’s true for an early stage SaaS founder..

I think NDR is a bad metric and potentially disastrous for early stage founders. The reason is simple - NDR is not actionable and doesn’t help you highlight where your business needs to improve.

Let’s just look at the first 3 rows Tom uses in his example to illustrate why I think NDR is a bad metric:

Row 1: Starting revenue = 5812, Ending Revenue = 4659. NDR = -20%.
Row 2: Starting revenue = 3342, Ending Revenue = 3342. NDR = 0%.
Row 3: Starting revenue = 322, Ending Revenue = 361. NDR = +12%.

What do these figures actually mean?

Is Row 1 this really 20% churn, 0% expansion/cross-sell or is it 30% churn and 10% expansion/cross-sell?
Is Row 2 0% churn, 0% upsell or 10% churn and 10% expansion (or 5 and 15, or 15 and 5 etc.)?

Hmmm. You get the idea.

In early stages (and I would argue all stages) as a founder you have to be focused on reducing churn. Chasing expansion revenue comes a little later in the startup cycle and requires planning and execution. I am not sure how hiding either churn or expansion in a generic metric helps anyone.

NDR doesn’t help the CEO know where to focus. NDR doesn’t help the leader of CS understand whether churn is good or bad. NDR doesn’t help you sales leader understand cross-sell and expansion. These are the discussion that need to take place and these can only take place with the individual metrics.

I am sure people will say that tracking NDR doesn’t mean you stop tracking the individual elements but my question then is, if you track the underlying elements and they are the only way to really understand and drive improvement, what’s the point of tracking NDR?

Scaling a startup is difficult enough without having to waste time presenting and discussing meaningless metrics. What am I missing?