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On average, it's 5 times more expensive to acquire a new customer than retain an existing one.
There's no doubt that your current customers are your most important assets. But traditional customer metrics such as CAC and churn don't provide visibility into the whole picture of customer sentiments. This is where net dollar retention comes in.
Net dollar retention (NDR) is an invaluable SaaS metric that helps evaluate the health of your customers and in turn, the health of your business.
This article explores everything you need to know about NDR.
TL;DR:
- NDR helps determine the revenue retained from existing customers after considering churn and expansion
- Calculating net dollar retention helps identify blockers in your growth like poor product fitment or low customer engagement
- The median NDR for private SaaS companies is 105%
- Improve NDR with better Customer Success operations, user analytics and sales-CS alignment
- Factors.ai can improve sales-CS alignment with account intelligence features
What is Net Dollar Retention?
Net dollar retention is a metric that measures the rate of change in annual recurring revenue over a defined period of time.
The value of NDR helps determine the revenue retained from existing customers after considering churn and expansion.
It's a metric that quantifies customer success in terms of revenue retention, helping you evaluate what percentage of your recurring revenue you’ve retained and if you’ve been able to grow that value over time.
how to calculate net dollar retention?
NDR = (ARR at the start of the year - Churn - contraction + Expansion) / ARR at the start of the year
Let's say you want to calculate the NDR for the year.
At the beginning of the year, you have 100 customers, each paying $1,200 per year. So, your Annual Recurring Revenue (ARR) at the start of the year is 100 customers * $1,200/year = $120,000/year.
During the year, you experienced some changes:
Churn: 5 customers decided not to renew their subscriptions, resulting in a loss of $6,000 in ARR.
Expansion: However, you managed to upsell 10 existing customers to a higher-tier plan, each paying an extra $600/year, resulting in an additional $6,000 in ARR from expansion.
So your NDR is:
NDR = {($120,000 - $6,000 + $6,000) / $120,000} * 100, which is 100%.
This means that, on average, you retained and expanded revenue from your existing customer base, offsetting the revenue lost due to churn. An NDR higher than 100% signifies growth in recurring revenue, while a value below 100% signifies a loss in recurring revenue.
NDR can also be calculated for each month using MRR instead of ARR in the formula:
NDR = (MRR at the end of the period - Churn + Expansion) / MRR at the start of the period.
This helps track changes in revenue on a monthly basis.
Why Is NDR Important For SaaS?
When SaaS startups reach the growth stage, they struggle to break the chasm of early adopters. A chunk of revenue is generated through customers who are looking for new technology to experiment with. You’ll have to experiment with pricing strategies, messaging, and deal with higher churn in the early stages of your business. This means that simply measuring unit metrics like churn gives you a rather pessimistic view of your operations. To add to that, your customer success teams bear the brunt of this limiting perception of revenue generation.
Net dollar retention is a cohort-based metric. It allows you to focus your efforts on your most valuable customers. As the company scales, it becomes imperative to identify the sources of recurring revenue and optimize your operations to better serve such customers. Periodically calculating net dollar retention helps identify any blockers in your growth. A low NDR can be caused by high churn and/or limited expansion. This could signify any of the following:
1. Low Customer Engagement
A low NDR can be attributed to the fact that a significant portion of users did not fully engage with the software during the free trial period, or failed to derive substantial value from it. This lack of customer engagement often results in a reluctance to upgrade, leading to missed upselling opportunities. A diminished NDR necessitates an enhancement of customer success operations, a thorough examination of the signup process, or a refinement of the onboarding and training procedures.
2. Poor Product Fitment
A low NDR may also signify problems in the product-to-market fit. If churn is high and leads to a reduced NDR, it may be time to reevaluate the product offering and set up thorough feedback loops to understand the customer’s needs better. Similarly, if there is little revenue generated from expansion opportunities, it contributes to a low NDR. It can imply that customers are not convinced of the value addition in upgrades, and the product offerings should be reevaluated.
3. A Key Metric for Investors
NDR plays an important role in investors' decisions. A healthy NDR indicates that you have a strong product-to-market fit and the solution resonates with the intended audience. It serves as a predictor of future growth, as it is a strong indicator of scalability and long-term viability, making it a key factor in investment decisions.
Net Dollar Retention Benchmark: What’s A Good NDR?
A report published by RevOps determined that the median NDR for private SaaS companies was 105%, with the 75th percentile falling above 110%.
If your NDR is close to 105%, you’ve got nothing to worry about. If it is above 110%, there’s cause for celebration. And if you’re below 100%, you should look into ways to improve retention.
The report further suggested that the NDR is not materially correlated with the company size, as it is with other variables including Go-To-Market motion (Product-Led Growth vs. Sales-Led Growth) and pricing model (pure subscription versus Usage-Based Pricing).
5 Ways To Improve Net Dollar Retention
A happy customer will stay with you. A delighted customer will grow with you. A low NDR shows that your customers do not see value in your product offerings or are struggling to derive value from it.
This could be because of poor training, creating a longer learning curve. Maybe the customer opted for more features than they needed, and now they feel overwhelmed when using the tool. Maybe the product isn’t intended for a company that size, or they don’t see the appeal of upgrades. There are ways to improve the user and post-sales experience to:
1. Invest in Customer Success
Customer success often takes a backseat when we think of revenue generation. However, customer success teams enjoy the strongest bonds with customers and should be encouraged to identify and capitalize on these opportunities. Allocate resources to strengthen your customer success team to ensure that they can contribute to the NDR.
2. Use Product Analytics Amongst Power Users
Analyze the behavior of your most engaged users to identify features or workflows that resonate with your ideal customer profile. This will help you narrow down your positioning and attract more high-value customers. These insights may also be leveraged to guide your product road map to ensure high adoption and lengthy customer lifecycles.
3. Keep Customers Involved
Engage customers through regular communication, interviews, feedback mechanisms, and user groups to understand evolving requirements and expectations.
4. Optimize Contract Terms Based on Customer Preferences
Offer flexible contract terms and pricing options that align with different customer needs and preferences, promoting upsell opportunities. This will promote customer delight and lead to higher retention rates or open doors for expansion.
5. Look Into Sales-Customer Success Alignment
One of the key and often overlooked factors in customer success is its alignment with sales and marketing functions. Having first-hand access to customer feedback, customer success teams are equipped to identify the most serviceable customers. The customer success team can help align your messaging and sales efforts to speak to target the ideal customer profile for your business. Aligning the marketing, sales, and customer success functions will help you identify the customers you can serve best, consequently leading to lower churn and higher NDR.
How Factors Helps Improve Net Dollar Retention?
Most businesses chase sales-qualified leads. But getting a sale is only half the battle won. Ensuring a good customer experience, customer satisfaction, and customer retention are equally important for a better NDR. It is crucial to ensure that efforts prioritize CS-qualified leads over sales-qualified leads. While marketing and sales can bring in many customers, focusing on the most serviceable ones will help you scale faster. With Factors.ai's account intelligence and analytics, you can identify the right, high-intent accounts with longer retention, higher growth, and optimized NDR.
Factors can identify up to 64% of anonymous accounts visiting your website, engaging with product reviews, or viewing your LinkedIn ads. Its event-based data model helps you identify the most effective messaging and marketing touchpoints.
Net Dollar Retention FAQs
Q: What is the net dollar retention formula?
A: Net Dollar Retention (NDR) = ARR at the start of the period - the revenue lost due to churn + the revenue generated through Expansion (cross-sell, upsell, etc.) divided by the ARR at the start of the period.
Q: What does 100% net dollar retention rate mean?
A: 100% net retention signifies that a business retains and expands revenue from existing customers, offsetting any losses from churn.
Q: What’s The Difference Between GDR and NDR?
A: GDR (Gross Dollar Retention) measures total revenue retained from existing customers, while NDR (Net Dollar Retention) considers revenue lost to churn and gained from expansion, providing a more precise growth indicator
