What is net dollar retention, and how can you improve yours?

That being said, improving NDR is easier said than done and requires leveraging key tactics such as upselling, cross-selling, and doubling down on Customer Success to minimize churn risks.

In this article, we'll explore the concept of NDR and why it matters for SaaS companies. We'll also share practical tips and strategies for improving this crucial metric and driving sustainable growth.

What is net dollar retention (NDR)? 

Net dollar retention is a SaaS metric that reflects how a SaaS company's annual recurring 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.

There are two methods for calculating NDR: the first uses annual recurring revenue (ARR), and the second uses monthly recurring revenue (MRR). ARR-based NDR looks at the total revenue generated from all active customers at the beginning of a period and compares it to the revenue generated from those same customers at the end of the period. MRR-based NDR calculates the revenue generated from customers on a monthly basis, which is then compared between the beginning and end of the period.

By tracking NDR, SaaS companies can gain insight into their ability to retain customers and increase revenue from existing customers over time. Improving NDR is critical to achieving sustainable growth, as it's often more cost-effective to retain and upsell existing customers than it is to acquire new customers. In the following sections, we'll explore strategies for improving NDR and driving long-term growth.

Why NDR is important for SaaS businesses

Net dollar retention is a key metric for SaaS companies that reveals how well they're maintaining and growing their existing customer base. 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.

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.

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.

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

How to calculate net dollar retention

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).

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

To calculate NDR using MRR, follow the same steps as above but use monthly recurring revenue figures instead of annual.

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.

Calculate NDR using ARR:

Here’s a formula that you can use to calculate NDR by using ARR. 

Net Dollar Retention (NDR) = (Starting ARR - Churn + expansion) / (Starting ARR)

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.

Calculate NDR using MRR:

Here’s a formula that you can use to calculate NDR by using MRR. 

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

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.

What is a good net dollar retention rate?

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.

NDR vs other SaaS metrics

NDR is just one of several critical metrics that SaaS companies use to evaluate performance and growth. Other metrics include MRR (Monthly Recurring Revenue), ARR (Annual Recurring Revenue), NRR (Net Revenue Retention), churn rate, customer lifetime value, and gross dollar retention.

NDR takes all of these metrics into account, as it reflects the changes in revenue generated from existing customers due to churn, expansion, and contraction. Therefore, NDR is closely related to MRR, ARR, and NRR, as changes in these metrics can have an impact on NDR.

• Monthly recurring revenue (MRR): MRR is a SaaS metric that measures the recurring monthly revenue generated by a company's subscription-based business model. It’s calculated by multiplying the number of active subscribers by the average revenue per subscriber.

Monthly Recurring Revenue (MRR) = Number of active subscribers x Average revenue per subscriber (per month)

• Annual recurring revenue (ARR): Similar to MRR, ARR is also a SaaS metric reflecting the recurring revenue generated by a subscription-based business model. However, ARR is generated measures revenue on an annual basis vs. a monthly basis. It's calculated by multiplying the average revenue generated per subscriber by the number of active subscribers.

ARR = MRR x 12

• Churn rate: Churn rate measures the rate at which customers leave a company's subscription-based service, while revenue churn specifically measures the amount of recurring revenue lost due to customer churn. Churn rate is typically expressed as a percentage and can be calculated by dividing the number of customers lost by the total number of customers at the beginning of a given period.

Churn rate = Number of customers lost during a given period / Total number of customers at the beginning of the period

• Customer lifetime value (CLV): LTV, or Customer Lifetime Value, is a SaaS metric that measures the total revenue a customer is expected to generate during their relationship with a company. It includes the customer's subscription fees, as well as any additional revenue generated through cross-selling, upselling, or referrals. Calculating LTV helps SaaS companies better understand the long-term value of their customers and make data-driven decisions about customer acquisition, retention, and service.

LTV = (ARPA Gross Margin Avg. Customer Lifespan)

Where:

• ARPA: Average Revenue Per Account

• Gross Margin: (Revenue - Cost of Goods Sold) / Revenue

• Avg. Customer Lifespan: the average length of time a customer continues to use the product/service before churning or canceling their subscription.

• Gross dollar retention: Gross Dollar Retention (GDR) is a SaaS metric that measures the total amount of revenue retained from existing customers over a given time period, typically one year. It is calculated by subtracting any lost revenue due to customer churn from the company's starting revenue for the period. GDR, also known as Gross Revenue Retention (GRR), provides insight into the overall health of a company's customer base and can be used to track the effectiveness of customer retention and expansion strategies.

Gross dollar retention (GDR) can be calculated by subtracting the total revenue lost from churned customers from the total revenue at the beginning of the period and dividing the result by the total revenue at the beginning of the period.

GDR = (Total revenue at beginning of period - Revenue lost from churned customers) / Total revenue at beginning of the period

How to improve your net dollar retention

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, and creating targeted marketing campaigns for at-risk customers 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.

Focus on customer onboarding

The onboarding process is critical to customer retention and NDR. Companies should aim to create a smooth, intuitive onboarding process that provides value to the customer and encourages them to continue using the product. 

Offering personalized support and resources during the onboarding process can also help to build strong relationships with customers, ultimately improving NDR. By following these steps, SaaS companies can improve their NDR and generate long-term success by retaining loyal customers and increasing total revenue.

Maintaining a healthy net dollar retention

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. 

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