Net Dollar Retention (NDR)

Along with gross dollar retention (GDR), net dollar retention (NDR) has become a popular metric for business valuation. An NDR rate of 100% or below indicates that the company is losing customers faster than it is gaining them (i.e., its customer base is shrinking).

What is Net Dollar Retention?

Net dollar retention describes the percentage rate at which a company’s annual recurring revenue (ARR) has grown or shrunk from one period to the next.

As a measure of revenue generated (or lost), NDR accounts for new customers added and existing customers lost, as well as any changes in customer spending levels during the given time frame.

If stakeholders want an up-to-the-minute snapshot of their revenue, they can calculate NDR using monthly recurring revenue (MRR) instead.

NDR shows companies—and investors—two main things:

• How much they’re growing without any new customer acquisition
• Customers’ satisfaction with the current value exchange between them and the business

How leaky is the bucket the company is trying to fill? And how sticky are its products?

NDR answers these questions holistically, with less guesswork.

Synonyms

• NDR: The abbreviation for net dollar retention.
• SaaS NDR: The measure of net dollar retention in a SaaS context (i.e., pertaining to software companies).
• Net Revenue Retention: Interchangeable term for net dollar retention, abbreviated as NRR.

Importance of Net Dollar Retention

Since NDR looks at revenue through a broad lens, businesses using a recurring revenue model use it to gauge the health of their customer relationships and overall business model.

A company’s NDR brings clarity to the whole RevOps ecosystem

Although revenue operations is a distinct subset of business operations, NDR encompasses all the components of revenue operations—sales, customer success and retention, pricing optimization, and churn management.

Measuring NDR clearly indicates how well those functions are working together—and where they need improvement.

Investors use NDR to assess a company’s future potential

Investors value B2B technology companies that have high net retention and expansion rates because it signals a reduction in investment risk, efficient and sustainable revenue growth, and potential for higher profitability margins. Net Dollar Retention is the preferred metric for evaluating such companies.

A study conducted by SaaS Capital reveals that a SaaS company’s valuation increases by 12% after five years with every 1% increase in net revenue retention.

For instance: On the day of Snowflake’s 2020 IPO, the company boasted an NDR of 158%.

This means its average customer was spending 58% more on the service over time—that is, if Snowflake stopped investing in customer acquisition on that day, they’d still have grown 58%.

For investors, this shows that Snowflake has a healthy, growing, and investment-worthy business.

Understanding NDR helps companies reduce customer churn

A company’s churn rate is closely tied to its NDR rate.

If an organization’s product or messaging is lacking and customers are unwilling to stay for longer periods of time, NDR reveals that.

The more customers a company retains, the higher its net retention will be and vice versa

A poor NDR rate is often an indicator that customers have a greater likelihood of downgrading or canceling their subscriptions altogether.

Companies that understand their NDR and how it relates to their product catalog and customer experience can use it to improve both.

Businesses measuring NDR understand their customers (and how to retain them)

Driving revenue growth by constantly adding new subscriptions is both costly and unsustainable.

SaaS companies looking to expand beyond sales should consider cross-selling, upselling, and introducing new products/services to their current customers.

With NDR, sales and customer success teams have an easier time selling internally, and existing customers benefit from additional services.

This increases customer lifetime value (CLV) on a micro level and boosts the customer retention rate and expansion revenue for the company as a whole.

How to Calculate Net Dollar Retention

NDR is expressed as a percentage rate of revenue from customers retained over a given time period.

It is calculated using the following formula:

Net Dollar Retention (NDR) = (Beginning Customer Revenue - Revenue Churn + Expansion) / (Beginning Customer Revenue)

For example, if a company has $200,000 ARR from its customers at the beginning of the period and it lost $20,000 in revenue churn but gained an additional $25,000 in expansion over that same period, its NDR would be:

NDR = ($200,000 -$20,000 + $25,000) / ($200,000) = 107%

Net Dollar Retention Benchmarks

Although an NDR rate of 100% indicates no customer churn, it also means the company isn’t growing at all.

A comprehensive review of of 40 SaaS companies’ S-1 forms revealed a median NDR of 109%. According to Crunchbase, the average NDR of companies that successfully IPO is about 107%. This serves as a baseline for evaluating a company’s performance relative to its peers in the SaaS industry.

In most industries, an NDR between 120% and 130% indicates a high level of customer satisfaction and the potential for sustainable growth.

Companies with an NDR in this range are not only retaining their existing customers but also successfully upselling and expanding within their customer base at a rate of 20% (or more) year over year.

If a company’s NDR falls below 100%, its customer base is shrinking.

This may be temporarily expected if the organization is going through repositioning (i.e., focusing on a different set of customers). Most of the time, however, it indicates customer dissatisfaction, short customer lifetimes, and poor retention.

Current Customers and Revenue Retention

Revenue retention is an essential metric for measuring customer loyalty. If a company wants to grow sustainably, its members need to prioritize their current customers.

Customers’ Impact on Revenue Retention

A business’s current customers have the greatest impact on its NDR rate. Briefly, here are a few statistics showing the value of current customers in revenue retention:

• Customer acquisition costs are around five to seven times greater than those of retaining loyal customers.
• A 5% increase in retention increases profits between 25% and 95%.
• Selling to existing customers yields a success rate of over 60%, while selling to a new one works as few as 1 out of 20 times.
• Companies lose $138.6 billion every year due to preventable customer churn.

The financial implications for a company that fails to prioritize customer retention and revenue retention are clear: At best, they won’t grow without loyal customers. At worst, they quickly fail.

Strategies for Improving Revenue Retention Rates

Improving revenue retention rates for current customers is essential for sustainable business growth. Here are a few strategies to leverage existing customers for an increase in revenue:

• Offer excellent customer service. According to Microsoft’s Global State of Customer Service Report, 96% of customers say customer service is an important factor for brand loyalty. “Excellent customer service” entails fast response times, helpful resolutions to customer issues, self-service options, and personalized communication.
• Implement customer feedback mechanisms. Conduct NPS surveys to gauge satisfaction (or lack thereof) with your product. Use feedback to identify customers that are at risk of churning before they cancel their subscriptions.
• Offer loyalty programs. Rewards for loyalty are commonplace in customer journeys, and they pay handsomely. 43% of customers spend more money with brands they’re loyal to, and have longer customer lifetimes than non-members. Consider rewards or incentives for repeat customers, such as sales discounts or points they can redeem for future purchases.
• Personalize services to meet customers’ needs. Use customer data to tailor your products or services to their needs while, at the same time, upsell related products or services. The more personalized an offering, the more likely it is for customers to continue using your services.
• Upsell and cross-sell. Offering premium-level services to customers to provide additional benefits improves low retention rates. Getting customers to subscribe to complementary services improves their experience.

Additional Ways to Increase NDR

Businesses should use multiple strategies to increase their NDR. In addition to those above, the following strategies are effective user retention strategies that increase revenue over time.

Drive product adoption with in-product guides

When customers are highly engaged with their products and know how to use them properly, they are considerably less likely to switch providers.

That’s why so many companies invest in in-product guides and other interactive elements in addition to their customer onboarding programs.

This helps customers get familiar with the product quickly, which decreases churn and increases revenue retention.

Create product roadmaps for each client

For most SaaS companies, the biggest lever is (of course) their SaaS.

Most products are built on a microservices architecture—that is, they include a series of components that can be used individually, or combined together to provide additional features.

In addition to in-product educational content, developing product roadmaps for each customer ensures they’re taking full advantage of their product’s features as intended for their business.

Use a subscription-based pricing model

Subscription-based pricing models are popular because they offer customers predictability and convenience—two features that boost customer loyalty.

Customers feel secure knowing that they can retain their services as long as they want them, without any surprise payments.

Automate subscription billing

Among others, there are four main challenges with subscription billing:

• Errors in manual processes can result in overcharges, missed payments, and/or forgotten payments.
• Inability to accept multiple payment options pushes some customers out
• Customers may forget to renew or cancel their subscriptions.
• Billing discrepancies can result in customers switching providers.

Involuntary churn (i.e., when a customer can’t make payments due to the above issues) accounts for up to 40% of churn in SaaS companies.

For the most part, all of these are 100% preventable with automated billing. Plus, automation makes the accounting processes that follow shortly after much easier.

Partner with value-added resellers (VARs)

VARs generally offer additional services, such as IT support, that add to the customer’s experience and satisfaction with your product.

In addition to providing an added layer of security for customers, they enable organizations to tap into new customer segments without investing more money in sales, which can help increase long-term revenue retention.

Host product webinars and seminars

The more customers and prospects are involved in the company’s vision, the better.

Webinars and seminars are a great way to educate customers on not only how to use your products and services, but also share workflow tips and tricks that help their business operate more efficiently

Improve internal efficiency

When organizations can develop, market, and sell products with minimal resources, their bottom line increases.

From a sales, marketing, and product standpoint, iterating quickly at the lowest possible cost means more sales opportunities for the company.

From the standpoint of the company’s bottom line, it also hedges against risk of customer churn (some of which is inevitable).

Invest in employees

Customer revenue increases when employees are satisfied and motivated.

Ultimately, this means investing in:

• Training
• Competitive salaries
• Benefits for employees
• A positive work environment

Employee motivation and engagement have a direct (positive) impact on net revenue retention, since engaged employees are better equipped to handle customer issues and inquiries.

In turn, this leads to more satisfied customers who are less likely to churn.

Improve lead qualification processes

Selling to anyone and everyone might land a few short term deals, but it won’t work well for sustainable growth—and that’s what NDR is all about.

Sales qualified leads (SQLs) should fit the company’s ideal customer profile, and have an identified need that your product can fill.

To ensure this, establish criteria (such as budget thresholds and purchasing authority), that sales teams can use to qualify leads before they even begin selling.

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