Notorious PLG 2.1.22: Retention
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Retention
I believe that retention should be the north star metric for every PLG company. Retention is a measurement of how long customers stick around and actively engage with your product. If your product has high retention, users are finding value and you likely have achieved product-market fit. If your product has low retention, you have a “leaky bucket problem” and it becomes prohibitively expensive to sustainably grow your userbase as customers churn out faster than you can acquire them and grow. Retention is measured in different ways:
User Retention: This is the purest calculation of retention. User retention analyzes a cohort of users that signed up in given period (usually a month). This includes every user that signed up from paying power users to free trial users to exploratory tire-kickers. If a company had 1,000 users sign up for its product in January 2021 and 300 of those users used the product at least once in January 2022 then the 12-month retention would be 30%. User retention is overall across all users, most of which will be free users with a smaller percentage of paid users.
Activated Retention: Activated retention is often defined by management and is different for different companies. For example, some communication applications (think Slack or Zoom) will choose to define Activated Retention as: a user who signs up for the product and communicates with at least two other users in the first week of usage. Sometimes its easier for product and growth teams to segment their users by activated vs. non-activated so teams can maniacally focus on improving the % of users that become activated during the signup flow. Similar to how customers walk into a store and don’t buy anything, PLG companies have users enter the product and leave before taking an action. Although it can be like comparing apples to oranges when trying to compare activated retention across companies, it can be helpful to compare what % of users become activated and how this changes over time.
Logo Retention: Logo retention looks at how a product retains a set of users, typically a company. For example, if users from 10 different companies are using a product this month and users from 5 of those companies are still using the product a year from now, the 12-month logo retention would be 50%. Logo retention is certainly useful, but I don’t think it is as useful as User Retention because it may be that there are 100 users each from 10 companies using the product this month and in a year, only 2 users from each of the 10 companies are still using the product. Thus, the 12-month logo retention would be 100%, but the 12-month user retention would be 2%. This is a stark contrast! It is worth noting logo retention is often calculated just for paid customers.
Net Revenue Retention (NRR): NRR is one of the most powerful metrics for any PLG software company. To illustrate how to calculate NRR, let’s assume a company has 10 paying customers each paying $10K per year. If we look at those 10 paying customers today, the starting metric for the calculation is annual recurring revenue from that cohort of customers so it’s 10 * $10K = $100K. Next, we look at what that same cohort of customers is paying 12 months from now, net of churn. Let’s assume 3 of those customers churn out so 7 are left, but those 7 customers are now each paying $20K per year instead of $10K. Thus, we multiply 7 * $20K = $140K. Now, we compare the two annual dollar numbers so we take $140K divided by $100K to get 140%. This means that the business will grow at 40% per year, even if no new customers are added! NRR is always expressed as a percentage.
Now that we have defined important retention metrics, what constitutes good and great retention for PLG SaaS businesses that sell to an end user. These benchmarks are meant to be directional.
User Retention (1 month):
Great: 50%
Good: 30%
Activated Retention (1 month):
Great: 70%
Good: 50%
Logo Retention (12 month):
Great: 85%
Good: 70%
Net Revenue Retention*:
Great: 130%
Good: 110%
*Note: Every week at the bottom of this newsletter I benchmark Net Revenue Retention for public PLG companies. The benchmarks I list above are for startups.
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Recent PLG Financings (Private Companies):
Seed:
Dyspatch, an email platform designed to design, test, and optimize transactional and marketing emails, has raised $6M led by Gradient Ventures.
Series A:
Stonly, a customer onboarding platform, has raised $22M. Northzone led the round, and was joined by Accel.
Atrium, a sales performance analytic platform designed to track and monitor activities, has raised $20M. The round was led by Craft Ventures and included existing investors Bonfire Ventures, BullPen Capital and CRV.
Series B:
Scratchpad, a startup that is building a tool to make it easier for salespeople to enter data into Salesforce, has raised $33M at a $283M valuation. Craft Ventures led the round, with participation from Accel.
Ridge, a scalable edge cloud platform designed to enhance application performance, minimize time-to-insight and unlock real-time event processing, has raised $22M. The round was led by NFX with participation from Mayfield, Viola Ventures, and Slow Ventures.
Series E:
Dremio, a SQL lakehouse company, has raised $160M at a $2B valuation. Adams Street Partners led the round, and was joined by StepStone Group, DTCP, Sapphire Ventures, Insight Partners, and Lightspeed Venture Partners.
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Note: TTM = Trailing Twelve Months; NTM = Next Twelve Months. Rule of 40 = TTM Revenue Growth % + FCF Margin %. GM-Adjusted CAC Payback = Change in Quarterly Revenue / (Gross Margin % * Prior Quarter Sales & Marketing Expense) * 12. Recent IPOs will have temporary “N/A”s as Wall Street Research has to wait to initiate converge.