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Leading SaaS companies are shifting to a new scale-up model focused on long-term relationships, efficient growth, and net dollar retention (NDR). But what exactly is NDR? Here’s everything you need to know.
This video, originally created for Paddle Studios, includes a breakdown of NDR and poses the question: How durable is your business, really?
What is net dollar retention (NDR)?
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 net dollar retention is an important metric for SaaS businesses
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). Just look at the NDRs of these scale-ups on their (very successful) IPO days:
- Snowflake - 158%
- Twilio - 155%
- Elastic - 142%
- PagerDuty - 139%
- AppDynamics - 123%
If Snowflake had suspended all customer acquisition activity a year before their IPO day, they still would have grown by 58% that year by the grace (and increased spend) of customers they’d already acquired. That is one solid foundation to be building on.
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.
If your NDR is lower than 100%, your existing customer base is contracting. You can still see a positive monthly recurring revenue (MRR) overall with an NDR below 100%. This would be the case if your customer acquisition revenue is greater than the revenue contraction from existing customers. If you’re only paying attention to MRR, you could easily overlook how much money is leaking from the business and obstructing your growth. Plugging those leaks will propel that growth.
What’s the benchmark for the net dollar retention rate?
A review of the NDRs of 40 SaaS companies when they filed their S-1 form (in anticipation of going public) shows the median as 109%.
If your net dollar retention rate is above 120%, you're in truly excellent shape.
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.
Simple net dollar retention formula for calculating NDR
The formula for net dollar retention for a set period is as follows:
Here’s an example to make NDR calculation a little clearer:
A small business starts the year with $500,000 in annual recurring revenue.
Over that year, a whole bunch of existing customers decide to upgrade their subscriptions and spend more with the company — this amounts to $100,000 more recurring revenue.
Other customers decide to downgrade, causing a reduction of $30,000 in total.
Then there are a few who decide to stop their subscriptions altogether. That comes to $10,000 in revenue churn.
Plotted into our above the net dollar retention rate formula, the equation becomes:
($500,000 + $100,000 - $30,000 - $10,000) / $500,000 x 100 = 112% NDR
That year, the business grew by 12% ($60,000) in ARR from the customer base they went into the year with. Any further growth in ARR they experienced will have been from new subscriptions.
3 ways to grow SaaS company NDR
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?
1. 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.
Focusing on delivering customer value increases the net dollar retention rate because of upgrades and subscription renewals.
2. Leverage your data
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.
Payments infrastructure: Involuntary customer churn — which is when a customer’s subscription is cancelled because of failed payments — accounts for 20-40% of churn in SaaS. That’s no small amount. A well-oiled payments infrastructure will protect you from cancellations and similar losses.
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Net dollar retention FAQs
What is a good net dollar retention?
A good net dollar retention rate is a minimum of 100%. Anything above that means that the current total average recurring revenue (ARR) is greater or equal to the starting ARR.
What is the difference between net dollar retention and gross retention rate?
Gross dollar retention indicates the revenue a company maintains before accounting for the average customer value. Net dollar retention indicates the amount of revenue a company maintains after revenue-increasing activities are accounted for.
What is the difference between net dollar retention (NDR) and net revenue retention (NRR)?
When analyzed as SaaS metrics, net dollar retention (NDR) and net revenue retention (NRR) are used interchangeably. However, NDR is defined as the average percentage change in revenue earned during an individual customer’s first 12 months, while NRR measures the percentage of revenue earned from all customers over the current 12-month period.
