A Blood Bath for Net Dollar Retention Rates

It’s tough out there if you’re a net dollar retention rate.

I took a look at NDR’s across a swath of tech companies who make their figures publicly available. I compared the highest and lowest rates they reported over the last two years and measured the gaps. Below are the companies who saw the nastiest declines.

Across the broader set I looked at (n = 32) the average drop was 7%, and the median was 5%.

But that doesn’t tell the full story.

Usage based companies (and historically top quartile standouts) Snowflake, Digital Ocean, Zoominfo, Elastic, DataDog, and MongoDb all experienced double digit declines.

So what’s going on?

If I were to summarize: Hiring declines, optimization pushes, and buyer’s remorse.

Hiring across the tech industry, which also happens to be its largest buyer, fell. That means there’s less opportunity for license growth.

“I once sold a company that wasn’t out of stealth 275 3rd year licenses.

And they were worried it wasn’t enough 😂”

-Text from my friend who runs sales at a software company

CFOs aren’t looking to commit to more spend for a slightly larger discount if they aren’t too sure what their headcount will look like two years from now.

❝

“Executives at Salesforce, UIPath and other companies have acknowledged in recent days that businesses have turned hesitant about doing big software deals. They’re grappling both with macroeconomic uncertainty and very real questions about the effectiveness of AI-powered tools. Those questions would surely cause anyone to hesitate before pulling the trigger on long-term commitments.”

-The Information

Signing up for longer term contracts just isn’t a great risk adjusted tradeoff anymore.

Let’s explain the usage based piece of the equation - there are two sides to it.

Net dollar retention rate is like a video game cheat code in good times: Customers start at a lower level than subscription, and ramp their activity over time as the product becomes a core part of their workflow. This puts the majority of their growth into the expansion bucket, which gets big time net dollar retention credit.

BUTTTTT…

Usage is easier to scale back during macro headwinds: The same volatility on the way up, also exists on the way down. When times get tough, it’s much easier to “optimize” your consumption spend than it is to get out of an ironclad, annual ass Subscription contract. Dad might come home from work and turn the thermostat down.

And many usage based contracts are linked to a value metric associated with revenue growth. So when top line stalls, what gets paid out to vendors drops too. And those vendors, in turn, also need to “optimize” their expenses.

“Optimize” should be interpreted as a bearish term in earnings calls. It essentially means your customers are looking to reduce costs by identifying and eliminating any slack in their cost structures. Many times they find it in orphaned licenses, over zealous API calls, and always on cloud queries.

Finally, not to be Douglas Downer over here, but there could be a further reckoning - many companies who bought massive three and five year ramping commitments in 2020 and 2021 are entering the tail years. Do they regret buying ahead? Will they sign up for the same amount going forward?

Net dollar retention rates in the second half of 2024 will indicate any such buyer’s remorse.