# Retention rate and recurring revenue

The old brain has seized up and needs help. I understand Retention Rate to be existing customers maintain or grade up their subscriptions or pay more for them. You can quote Retention Rate either as a customer figure or a \$ figure, expressed as a %. All that is clear.

The fog sets in when I try to differentiate Retention Rate from Recurring Revenue, always spoken of as a separate item. I understand Recurring revenue to be (quoting Saul) ‘last year’s revenue repeating this year and building from there…’.

I know I’m being thick but someone take pity if you have a moment and explain the difference.

The fog sets in when I try to differentiate Retention Rate from Recurring Revenue, always spoken of as a separate item. I understand Recurring revenue to be (quoting Saul) ‘last year’s revenue repeating this year and building from there…’. I know I’m being thick but someone take pity if you have a moment and explain the difference.

Hi Streina,

Recurring Revenue is the revenue that recurs each quarter because it is on a subscription. Usually a software subscription. It can be listed as dollars, or as a percent of revenue. By definition it is always less than total revenue in dollars (less than 100% of revenue in percents).

Dollar-Based Net Retention Rate is really different. It takes the dollars received as revenue from all of last years customers in the year ago quarter and compares them to the dollars received from from those same customers this year, not counting any new customers acquired this year. Thus a Dollar-Based Net Retention Rate of 130 means that last years cohort spent 30% more this year than last year (even allowing for any that dropped out, which is why it’s called Net Retention Rate). We are looking for numbers over 100% because that means that customers are not only renewing, but like what they are getting enough to order more of it.

Hope this helps,

Saul

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For a concrete example of how they differ, consider Pivotal:

Last quarter their subscription revenue was 58% of total revenue (up from 44% a year ago). That’s their recurring revenue, at 58% of total revenue.

Their dollar-based net expansion rate was 156% (I presume that is on their Subscription customers). It has been over 150% for seven quarters. That means their existing subscription customers increase their spend by over 50% year over year.

Best

Saul

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Many thanks Saul for taking the time to explain that and give an example. Much appreciated.

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For a concrete example of how they differ, consider Pivotal:

Last quarter their subscription revenue was 58% of total revenue (up from 44% a year ago). That’s their recurring revenue, at 58% of total revenue.

Their dollar-based net expansion rate was 156% (I presume that is on their Subscription customers). It has been over 150% for seven quarters. That means their existing subscription customers increase their spend by over 50% year over year.

Hi Saul,

I’m struggling with looking these numbers vs their growth rate of 28% last quarter, down from 37% the prior year for the May Q.

If 58% are recurring and they’re spending 56% more, why is total growth so slow? I guess that means the other 42% cut their spending by 10%…?

Not to speak for you ever, but doesn’t seem like the kind of explosive growth you seek out in your other holdings.

best,

Naj

ps Someone check that math but it looks right.

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Hi Saul,
I’m struggling with looking these numbers vs their growth rate of 28% last quarter, down from 37% the prior year for the May Q. If 58% are recurring and they’re spending 56% more, why is total growth so slow? I guess that means the other 42% cut their spending by 10%…? Not to speak for you ever, but doesn’t seem like the kind of explosive growth you seek out in your other holdings.

Hi Naj

Best,

Saul

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Their subscription business is growing about 55% to 60% while their legacy business is pretty stationary. Their subscription business has 90% Gross Margins, while their legacy business has 15% margins. After three years their subscription business is already 58% of their revenue and the legacy business is becoming less and less important.

Best,

Saul

Got it. Thanks!

best,

Naj