👋 Hi, I’m Kyle and welcome to my newsletter, Growth Unhinged. Every other week I take a closer look at what drives a SaaS company’s growth. Expect deep dive takes on SaaS pricing, product-led growth, public company benchmarks, and much more.
Investors look closely at retention rates as a signal of customer health, product stickiness, competitive differentiation and pricing power. Happy customers are the best long-term store of value at your disposal. They drive word-of-mouth adoption, demonstrate credibility with prospects in the sales cycle, and fuel continued innovation.
Retention rates—particularly net dollar retention—also strongly predict a SaaS company’s growth rate. The fastest growing SaaS companies see 89% annual logo retention and 109% net dollar retention (NDR) in their cohorts, according to data from OpenView’s SaaS benchmarking survey. That’s compared to 82% and 90%, respectively, among slower growing companies.
Somehow NPS has become synonymous with retention. These days it’s difficult to find a SaaS company that isn’t tracking their NPS on an ongoing basis (or boasting about their impressive NPS relative to peers). NPS is even a Board-level discussion point at many companies.
It’s time to take a step back and ask: Is NPS really the best we can do?
There are certainly some admirable benefits to measuring NPS. To (over-)simplify, tracking NPS:
Enables a culture of customer obsession
Helps you see (and address) unhappy customers before they churn
Creates a conversation across teams/functions to spot and address problems
Allows you to easily benchmark against peers on an ongoing basis
The problem: NPS does not equal retention
NPS doesn’t have mystical powers and it should not be exalted. For starters, NPS doesn’t turn out to be very predictive of logo retention or net dollar retention rates across SaaS companies, according to analysis of OpenView’s SaaS benchmarking data.
There does appear to be a correlation between NPS scores and logo retention rates (left chart), but it is extremely small. For every 10 additional points to a company’s NPS scores, there’s only a 0.9% higher logo retention rate. For statistics nerds out there, the R-squared is only 0.038, which means that NPS only explains 3.8% of the variance in logo retention rates across SaaS companies.
The correlation is even weaker when comparing NPS scores and net dollar retention rates. For every 10 additional points to a company’s NPS, there’s just a 0.55% higher net dollar retention. The R-squared is a measly 0.0053.
Now, to state the obvious, this analysis is comparing across all different kinds of SaaS companies and ignores a number of potentially confounding factors such as the size of the SaaS company, their target customer, and their product market.
Even still, it doesn’t look good for NPS and I think that’s because there are all sorts of measurement issues with collecting NPS data. Just off the top of my head those include:
Low response rates. Even when measured in-app, response rates for NPS surveys aren’t all that great.
Different sampling approaches. Who in the account do you send the NPS survey to—the economic buyer, the champion, the individual users, all of the above? Which accounts do you send the NPS survey to—everyone or only those who’ve implemented the product? Who sends the survey—the sales rep, an independent third party?
Data manipulation. At this point, NPS is such a well known and widely adopted metric that it’s particularly prone to manipulation from respondents.
Sensitivity. By the nature of how NPS scores are calculated (i.e. subtracting detractors from promoters), they’re extremely sensitive to slightly different scores. Every 5 or 6 can have a radical impact on the overall score. NPS scores tend to fluctuate quite a bit month-to-month or quarter-to-quarter for no great reason.
Lack of relevance. Let’s face it: some categories of products just aren’t casually recommended to friends or colleagues (Windows 10, anyone?).Subscribe now
Moving past NPS
Subscribe to Kyle Poyar's Growth Unhinged to read the rest.
Become a paying subscriber of Growth Unhinged to get access to this post and other subscriber-only content.
UpgradeA paid subscription gets you:
- Full archive
- Subscriber-only bonus posts
- Full Growth Unhinged resources library