Net Dollar Retention (NDR): Definition, formula & tips
Apr 15 2022
SaaS businesses need repeat customers because their business models usually rely on subscription services that customers continually use. Therefore, in order to grow, SaaS companies need to focus on the engagement and retention of their customers.
Part of the necessity for retaining existing customers and reducing churn (and attrition) is because acquiring new customers is costly, time-consuming, and challenging. Thus, turning customer loyalty into a revenue driver relies heavily on delivering value with your products and services.
According to Gartner, customers who appreciate the value they receive from a vendor interaction are 97% more likely to endorse the company through word-of-mouth and 82% likely to renew their subscription. The Gartner report suggests that excellent customer service can unlock customer loyalty and recurring revenue. That's the essence of net dollar retention.
Leading SaaS companies are opting for a new scale-up model that focuses on efficient growth, creating long-term relationships, and Net Dollar Retention (NDR). So what exactly does NDR mean? Here's what you need to know.
Net Dollar Retention (NDR) is a percentage reflecting how a business' annual recurring revenue (ARR) has grown or shrunk within a particular period. A company can also use its monthly recurring revenue (MRR) to narrow its timeframe and get an up-to-the-minute snapshot of its health.
NDR is a metric that recalculates annual recurring revenue to include growth and customer churn. It shows how well a SaaS business keeps, engages, and upgrades its customers—demonstrating its current health and viability.
Why is net dollar retention an important SaaS metric?
NDR is a critical SaaS business metric because it measures customer retention and the ability to keep existing customers engaged while delivering innovative features to help them meet or exceed their goals. NDR shows two critical things:
How much growth a SaaS business generates without acquiring new customers (in other words, how leaky the bucket they are trying to fill is)
How satisfied existing customers are with the value exchange a business provides, reflecting the strength and stickiness of products and value proposition
Overall, companies with an NDR of over 100% grow rapidly and have more cash efficiency than those with a lower NDR. As a result, they are more attractive to stakeholders, acquirers, and venture capitalists (VCs).
NDR shows how sticky a business' customers are and how long they are willing to use its services. When a SaaS business tracks its NDR and ARR (or MRR), it can clearly see the growth changes over time.
An NDR lower than 100% shows a contracting customer base. However, sometimes, it's also possible for a SaaS company to achieve net recurring growth even with a decreasing customer base if the revenue from new customers exceeds the revenue reduction from existing ones. Therefore, if the company only focuses on ARR and MRR, it can overlook possible leaking revenue and obstruct its growth.
How to calculate net dollar retention
A SaaS company calculates its NDR by taking its starting annual recurring revenue, adding new subscriptions and upgrades, and subtracting churn and downgrades before dividing the result by the original ARR.
Net Dollar Retention (NDR) = (beginning ARR + expansion) – (Churn or downgrades) / beginning ARR
Net dollar retention vs. gross dollar retention vs. net revenue retention
Below is the difference between the three metrics:
Net Dollar Retention: NDR tells a subscription company how much revenue it maintains after factoring in revenue-increasing growth activity.
Gross Dollar Retention: GDR tells a subscription company how much revenue it maintains without factoring in the activity that increases the average customer value.
Net Revenue Retention: NRR is the percentage of recurring value a company retains from its existing customers over a defined period (usually monthly or annually). NRR takes into account upgrades, cross-sales, cancellations, and downgrades.
Net dollar retention rate: what you should aim for
An NDR over 100% means there is an increase in revenue from existing customers and the company can grow without adding new customers. However, an NDR below 100% shows a decrease in revenue from customer churn and downgrades. It's a cause for alarm and shows that the business needs to make urgent changes around customer support and retention.
Net dollar retention is a critical metric for SaaS companies hoping to achieve hyper-growth or startups looking to become unicorns. In addition, these companies want to succeed in private equity partnerships, get VC funding, and launch initial public offerings (IPOs). The median NDR is approximately 106% while top-performing companies typically chart over 120%.
3 tips to improve your net dollar retention rate
NDR is the single most essential metric in determining the health of a SaaS company's customer journey. This customer experience is often dependent on a well-aligned, cross-functional revenue team. So how do companies improve their net dollar retention apart from creating and supporting a top-notch revenue team?
Deliver lasting value to your customers
Leveraging customer success, loyalty, and return business as revenue drivers relies on delivering lasting value. Excellent customer service can unlock customer loyalty and recurring revenue. Below are some ways a SaaS business can move towards becoming a value creator:
Commit: Commitment to deliver lasting customer value starts from the top and becomes the driving force behind the company's mission, values, and priorities. Financial performance and targets become a measure of value creation and not the end goals.
Focus on the client: The business focuses relentlessly on understanding and addressing client needs and issues. Everyone from the highest levels of senior management and internal corporate structures (HR, IT, and Finance) to sales-floor employees focuses on customer service and increasing value.
Invest in employees: A business' greatest assets are its employees. Therefore, it's critical to invest in employees and partners to reduce attrition and boost morale for higher quality output.
Improve efficiency: Establishing a culture of efficiency leads to increased value production with minimal resources. The lower production costs result in higher value to clients.
Adopt quickly and constantly: Continuous learning and improvement should become the company culture.
A company's CRM platform holds valuable information for its analytical team. Leveraging that data requires using revenue operations (RevOps) technology to help bring increased alignment and shared visibility across the company. It also allows teams to eliminate duplicate work, harness a centralized view of data, gain new data-driven insights, and make data accessible anywhere.
RevOps technology helps companies leverage their data to improve NDR. It maximizes the following CRM data points:
Net Promoter Score: NPS measures customer loyalty, willingness to recommend products, and experience. Reviewing the NPS score from a revenue perspective helps teams identify new growth opportunities and take proactive steps to build better long-term relationships.
Activity data: RevOps platforms also measure the health of a business by tracking emails, meetings, and other interactions such as sales, services, and customer success support. Activity data gives complete visibility into customer experiences and delivers intelligence for account engagement, improved opportunity management, and forecasting.
3. Lower your churn rate
Adding the net dollar retention metric into a company's reporting mix helps identify opportunities to reduce churn. For example, discovering cancellations and their impact on recurring revenue helps establish user retention strategies to minimize future cancellations. Attrition strategies include:
Upselling: Encouraging customers to subscribe to higher or premium-level services for added value. Upselling reverses a low retention rate.
Cross-selling: Encouraging customers to subscribe to other similar services to help improve customer experiences and low retention rates.
Customer acquisition techniques: Increasing subscriptions and reducing the impact of cancellations.
Use of key metrics: These metrics can identify churn before it becomes problematic. They can also generate invaluable daily, weekly, and monthly reports of various churn metrics, such as ARR, MRR, lifetime value, and average revenue per user.
How ProfitWell helps track, recognize, & increase your net dollar retention rate
ProfitWell products can help recognize, improve, and track your net dollar retention rate. Below are two products that can help:
ProfitWell Metrics is an accurate, free, and real-time subscription reporting and analytics software. It's made for SaaS subscription companies who care about their financial health and business outlook in real-time. The software helps companies uncover where their growth comes from by enriching their data insights with Clearbit and Full Contact to discover customer segments driving and detracting from growth. It also allows the slicing up of data by demographics (and supports up to 107 pre-built segments).
ProfitWell Metrics also tracks trials and attribution throughout the customer journey and provides accurate financial reporting. In addition, it gives a high-level view of the trends from existing and new customers, upgrades and downgrades, and churn.
2. ProfitWell Recognize
ProfitWell Recognize provides subscription businesses with audit-proof, rigorous, and precise revenue recognition. It also helps avoid human errors, an overabundance of spreadsheets, excess time spent on report analysis, and costly engineering resources.
A team of accountants and engineers support the software platform to help solve issues like deferred revenue, multi-element arrangements, and evolving industry and government standards. Additionally, it creates custom financial reports, including monthly recognized revenue, deferred revenue, tax reports, geography reports, and currency reporting.
Net dollar retention FAQs
What is the difference between NRR and NDR?
Net revenue retention (NRR) and NDR are similar metrics when it comes to measuring customer success. However, in bookkeeping, NDR measures the average percentage revenue change over a customer's first 12 months, while NRR measures the revenue a business retains from all customers regardless of time over a 12-month window.
What is the difference between NRR and GRR?
NRR reflects the ability of a company to retain and expand its monthly customers' spend while gross revenue retention (GRR) indicates only the ability to retain customers.
What does 100% net retention mean?
It indicates a revenue increase from existing customers and that a company can grow without acquiring new customers.
What is a good NDR for SaaS?
A good NDR for a SaaS company is 100% and above. The median NDR is approximately 106%, while top-performing companies usually chart over 120%.
Subscription software helping you achieve faster recurring revenue growth.