What is net dollar retention?

Net dollar retention is a SaaS metric that reflects how a SaaS company’s revenue has grown or decreased within a specific period, typically a year, month, or quarter. It measures the revenue retained from existing customers after accounting for customer churn, upgrades, downgrades, and cross-selling.

By tracking NDR, SaaS companies can gain insight into their ability to retain customers and increase revenue from existing customers over time.

There are two methods for calculating NDR:

• ARR-based NDR
  NDR based on annual recurring revenue (ARR) looks at the total revenue generated from all active customers at the start of the period and compares it to the revenue generated from those same customers at the end of the period.
• MRR-based NDR
  NDR based on monthly recurring revenue (MRR) calculates the revenue generated from customers on a monthly basis, which is then compared between the beginning and end of the month.

It’s important to note that while both methods will provide you with an NDR percentage, they may yield slightly different results due to the time frame used. Some companies may prefer to use ARR as it gives a bigger picture of customer behavior over a longer period, while others may prefer MRR for a more granular view. Ultimately, the method you choose should align with your business goals and customer retention strategy.

To effectively monitor and improve NDR, SaaS companies need to calculate it on a consistent basis. As mentioned earlier, there are two methods for calculating NDR: using annual recurring revenue (ARR) or monthly recurring revenue (MRR).

Step-by-step ARR-based NDR Formula

1. To calculate NDR using ARR, start by adding the ARR of all your customers at the beginning of the period.
2. Next, add any additional revenue generated from existing customers during the period, such as upsells or cross-sells.
3. Finally, subtract any revenue lost from customers who churned or downgraded during the period.
4. Divide the resulting revenue by the original ARR to get the NDR percentage.

Formula: Net Dollar Retention (NDR) = (Starting ARR – Churn + expansion) / (Starting ARR)

ARR-based NDR Example

Let’s say a hypothetical SaaS company, “Software Solutions”, has a starting ARR of $1 million at the beginning of the year. During the year, they lose $100,000 in revenue due to customer churn, but they also gain an additional $200,000 in revenue from expansion within their existing customer base through upsells and cross-sells.

Using the NDR formula, we can calculate the company’s net dollar retention rate as follows:

NDR = ($1,000,000 – $100,000 + $200,000) / $1,000,000 = 1.1 or 110%

This means that, on average, the company has retained 110% of its starting ARR from its existing customer base over the course of the year, after accounting for churn and expansion.

Using this information, the company can identify areas for improvement and implement strategies to boost NDR. For example, they might focus on improving their customer success programs to reduce churn rates or focus on upselling and cross-selling tactics to drive expansion revenue. By continuously monitoring and improving its NDR rate, “Software Solutions” can achieve sustainable growth and maximize the lifetime value of its existing customer base.

Step-by-step MRR-based NDR Formula

1. To calculate NDR using MRR, start by adding the MRR of all your customers at the beginning of the month.
2. Next, add any additional revenue generated from existing customers during the month, such as upsells or cross-sells.
3. Finally, subtract any revenue lost from customers who churned or downgraded during the month.
4. Divide the resulting revenue by the original MRR to get the NDR percentage.

Formula: Net Dollar Retention (NDR) = [(Starting MRR + expansion – downgrades – churn) / Starting MRR] * 100%

MRR-based NDR Example

Let’s say that a SaaS company, “Tech Inc.”, had a starting MRR of $100,000 at the beginning of the quarter. During the quarter, they upsold $20,000 in additional features to existing customers, while also experiencing $5,000 in downgrades and $10,000 in churn.

Using the formula, we get:

NDR = [(Starting MRR + expansion — downgrades — churn) / Starting MRR] * 100%
NDR = [($100,000 + $20,000 – $5,000 – $10,000) / $100,000] * 100%
NDR = $105,000 / $100,000 * 100%
NDR = 105%

This means that “Tech Inc.” was able to retain and grow its existing customer base by 5% in the quarter, despite experiencing some downgrades and churn. By regularly monitoring its NDR, this SaaS company can identify areas for improvement in its customer success efforts, such as reducing churn and increasing expansion revenue. This will ultimately lead to greater customer retention and revenue growth overall.

Net dollar retention is a key metric for SaaS companies that reveals how well they’re maintaining and growing their existing customer base. It shows whether customers are not only staying but also expanding their usage and spending over time.

• It reflects the real health of customers.
  By calculating and monitoring NDR, companies can better understand the health of their customer and base and accurately forecast future revenue growth without factoring in new ARR.
• It measures customer success.
  NDR also provides a benchmark for customer success, as it tracks the revenue generated from customers over time via cross-sells and up-sells. Companies can use NDR to identify trends in customer behavior and pinpoint areas for improvement. For instance, a low NDR may indicate that customers are churning at a higher rate, which could be due to issues with product quality or customer service.
• It affects your valuation.
  There’s also a significant correlation between a company’s NDR and its total valuation — according to a study by SaaS Capital, for every 1% increase in net revenue retention, a SaaS company’s valuation increases by 12% after five years.
• It drives sustainable, efficient growth.
  Improving NDR is critical to achieving sustained growth, as it’s often more cost-effective to retain and upsell existing customers than it is to acquire new customers.

Ultimately, improving NDR can help SaaS businesses achieve sustainable growth by reducing customer churn, increasing customer satisfaction, and driving revenue from existing customers.

So what is a good net dollar retention rate for SaaS companies?

This is a common question, and the answer depends on the specific business model, pricing strategy, and industry. Generally speaking, a good NDR rate for a SaaS company is one that is greater than 100%. This means that the company has increased its recurring revenue from existing customers, even after accounting for churn. However, according to the 2022 KeyBanc SaaS Metrics Survey, the median net dollar retention rate for private SaaS companies was 109%.

An NDR rate of 100% or higher is a positive sign for investors and can help a SaaS company during an IPO. However, it’s important to note that a high NDR rate alone doesn’t guarantee success. Customer satisfaction and retention are critical components of any SaaS business, and the net dollar retention rate is just one metric to consider.

Like any other SaaS metric, there are certain actions that need to be taken in order to see improvement over time. Here are some steps your company can take to improve your net dollar retention and gain better visibility over the health of your customer base.

Prioritize customer retention

Focusing on customer retention should be a top priority for any SaaS company. This means putting in the effort to understand and address the needs and challenges of your existing customers. Provide excellent customer service, listen to feedback, and regularly engage with your customers to build strong relationships that will keep them coming back.

Reduce customer churn rate

Reducing customer churn rate is a critical component of improving NDR. To do this, companies should:

• Analyze customer feedback and usage data to identify and address the factors that contribute to churn.
• Improving the onboarding process
• Offering incentives for customer loyalty
• Creating targeted marketing campaigns for at-risk customers

These are all effective strategies to reduce churn.

Leverage CRM data

Customer Relationship Management (CRM) data can provide valuable insights into customer behavior and preferences, which can be used to improve NDR. Analyzing CRM data can help companies identify trends, predict future behaviors, and identify opportunities for upselling or cross-selling.

• Monitor monthly recurring revenue, expansion rates, and churn across customer cohorts defined by industry, company size, or region.
• Use drill-down reporting and CRM insights to identify which segments show declining revenue trends despite approaching renewal times.
• Update product roadmaps and offer custom features or pricing plans designed to address specific cohort pain points.

In an industry like B2B SaaS where many companies rise and fall, maintaining a good net dollar retention rate is now one of the best indicators of long-lasting success.

To increase expansion revenue, SaaS companies must prioritize keeping existing customers happy by laser-focusing on customer retention, slashing churn rate, leveraging CRM data, and perfecting customer onboarding. By doing so, companies can improve their NDR, increase total revenue, and set themselves up for a splashy exit or IPO.

Want to double down on NDR and build stronger, long-lasting relationships with your users?

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