Net Dollar Retention: A Key Metric for Business Growth

What is net dollar retention?

Net dollar retention (NDR), also known as net revenue retention, is a metric often used with SaaS to take a deep look at revenue and financial numbers to gauge success and the state of a business.

In simple terms, net dollar retention is a way to measure how much money you earned or lost from your existing customer base. More specifically, the tool compares numbers from different periods. Most commonly, that timeframe is monthly.

Using that as an example, a business can compare NDR from the most recent month to the monthly average from the previous year. There are plenty of other ways to make these comparisons (quarterly, annually, etc.), but this example makes it easy to think about what NDR really means.

Doing this, you would look at your total revenue for the most recent month. You would then subtract revenue from new customers or clients. You’re intentionally excluding customer growth with this metric.

Once you have subtracted new customers, you can compare this month’s revenue to any previous month (or an average of months). This helps you analyze how much revenue you retain (hence the name) from existing clients.

In other words, it helps you track when you're losing clients or when they're spending more or less compared to other months. As such, you can adequately price your products to turn a profit and grow your business. You can also use this metric to improve your customer retention strategy, business stability, and baseline revenue expectations.

NDR is most commonly used for SaaS businesses but can apply to any business model, even if you're selling crafts online.

Net dollar retention vs. gross dollar retention

Gross dollar retention (GDR) is similar to net dollar retention with one key difference. NDR incorporates numbers from upgrades, downgrades, and cross-sales. For example, if an existing customer doubles the size of their monthly subscription, that increases your net dollar retention and should be included in your calculations.

Gross dollar retention deliberately ignores upsells and cross-sales. As a result, GDR helps you analyze how many customers are sticking with you from month to month. It also allows you to gauge how likely clients are to downgrade services over time.

Gross dollar retention is still represented as a percentage of your monthly revenue, but because it offers a narrower view of factors, it can help you zero in on a few specific aspects of your business model.

More than anything else, it expresses the long-term sustainability of your practice in revenue terms, making it easier to understand customer retention and retained customer spending.

Why is NDR an important metric?

NDR is important for a couple of reasons. For starters, it gives you an idea of the expansion or contraction of your business in terms of existing customers. If existing patrons spend less money each month, that’s a crucial insight for your company. Meanwhile, if they’re spending more monthly, it's a good indicator of long-term growth.

Yet, NDR excludes new customers, which adds value to this metric. By all means, understanding customer growth is very important, but that’s something you're likely to track as a function of your marketing and outreach investments. Understanding growth that specifically stems from existing customers helps you anticipate business once you reach market saturation, and it demonstrates the general sustainability of your service.

To summarize, net dollar retention tells you whether or not your essential service structure works for your customers.

How to calculate NDR

With all of this talk about the benefits of NDR, it might help to discuss how to calculate net dollar retention. The net dollar retention formula is simple:

• Begin by figuring out your starting monthly recurring revenue, or MRR.
• Add your MRR to what you earned from upgrades, including cross-selling opportunities.
• Next, subtract losses from customers that canceled the service. Also, subtract money from downsizing existing contracts.
• Divide that number by your MRR.
• Multiply by 100.

You can see how this gives you a net number that shows you whether your business is growing or shrinking based solely on returning customers. To keep the idea simple, if your NDR is over 100%, your business is growing, even if you don’t get a single new customer. If it’s under 100%, you need a constant stream of new customers to maintain growth.

What is a good NDR rate?

Let’s look a little deeper into that statement. What should your NDR rate be?

While there isn’t a magic number, anything over 100% is excellent. It suggests that your business model is very healthy and sustainable.

So, anything over 100% is positive and encouraging. Despite that expectation, many businesses that use a subscription model aren’t meeting this baseline. That means that plenty of companies live below 100%.

For a little more context, an NDR of 120% is considered very strong. This means that your business is doubling its revenue every 5 cycles (depending on which time period you're comparing) without adding a single new customer.

Depending on the vertical markets and services within your business models, there's room for a lot of variances. Regardless, a higher NDR is a generically good thing for any business.

How to increase your net dollar retention rate

Ok. You’ve checked your NDR and aren’t satisfied with the number. Maybe it’s under 100%, or perhaps you’re trying to optimize another area of your business. Either way, what can you do about it?

There are 3 basic approaches to increasing your NDR:

• Improving customer retention and satisfaction
• Encouraging account upgrades and cross-sells
• Surveying customers to identify areas of improvement

Let’s start with client retention. In general, you want to engage with your customers as reasonably as you can. If you understand why customers are leaving, then you can make plans to mitigate cancellations.

So, focus on communication that allows you to understand your clients. Communication can be as simple as a price increase letter and as complex as AI chatbots within your website.

That advice can also help with customer satisfaction. If you know what clients want, you can strive to provide it. Another way to boost satisfaction includes focusing on fast, responsive, and available customer support. Make sure your lines of communication are consistent and reliable.

As for upsells and cross-selling opportunities, those can be informed by your customer communication, but you can also introduce upsells into your business model. Theoretically, you should have an idea of how to make your SaaS more powerful or convenient for customers. Offer them those resources.

It’s important to put some effort into upsells. Don’t just provide upgrade options and hope that customers will choose them. Make sure your clients know about those upgrades. You can do that with emails, mentions on customer portals, or any other way that you regularly communicate with your patrons. You don’t need to spam them, but you should be confident that your customers are aware of the upsells you provide and their value.

You also want to provide plenty of opportunities for feedback and pay close attention to what your customers say. By encouraging clients to answer feedback surveys, you can take the negative and positive comments received to make improvements.

Use NDR to your advantage

If you haven’t been utilizing net dollar retention as a critical metric in your business, now is the time to start leveraging it for company growth. NDR can help you gain insight into your organization's recurring revenue, allowing you to see if you're successfully retaining clients.

Measuring NDR is fairly easy for SaaS businesses. When using the net dollar retention calculation, remember that the higher your rate is, the better. If the result isn't to your liking, there are many ways to increase it, such as improving customer satisfaction and encouraging upsells.

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