Billy Russel

Billy Russel - FP&A Strategist

August 2022 - min to read

Net dollar retention: why NDR is your new north star

Net dollar retention: why NDR is your new north star

When considering the growth potential of your SaaS company, it’s important to look at customer acquisition. But even more integral to growth? Your ability to keep customers on board while growing with your brand.

There are plenty of metrics for looking at customer loyalty and satisfaction. But the brass tacks numbers you should care about are all tied to revenue. 

Many financial professionals consider monthly recurring revenue (MRR) a table stakes metric for your reporting dashboard. 

MRR is important, but it's not a “one and done” metric. In fact, MRR can obscure the essential nuances of your revenue numbers.

How do you dig deeper into retention metrics to ensure stable growth?

Let us introduce your new North Star metric: Net Dollar Retention (NDR).

Today we’ll cover the basics of NDR: What it is, how it’s calculated, and what it reveals about the health of your existing business.  

Contents

  1. What is net dollar retention?
  2. How is net dollar retention (NDR) different from monthly recurring revenue (MRR)?
  3. Why should you track net dollar retention? 
  4. How is net dollar retention calculated?
  5. Six ways to boost your net dollar retention metric
  6. Bottom line: pay attention to net dollar retention

What is net dollar retention?

Net Dollar retention measures the growth of revenue within your existing customer base for a given period. It accomplishes this by measuring expansions and contractions in recurring customer spend, as well as customer churn. 

Net Dollar Retention, sometimes called Net Revenue Retention (NRR), is a fine-tuned growth metric that captures some of the detail MRR leaves out.  It uses MRR as a basis to more accurately account for shifts within your existing revenue base.

  • Expansions are increases in monthly spending from a customer. For instance, customers may upgrade to a more expensive plan, incur more usage charges, or increase their product portfolio through cross-selling. 
  • Downgrades are reductions in monthly spending. This occurs when a customer moves to a lower tier plan or reduces their usage. 
  • Churn occurs when a customer cancels their subscription or stops using the service entirely.

While expansions, contractions, and some churn (under 6% according to 2022 benchmarks) are expected, you want your revenue numbers to be stable, if not growing. Stability in your recurring revenue is a sign that your customer base is satisfied and even enthusiastic toward your service.

How is net dollar retention (NDR) different from monthly recurring revenue (MRR)?

Monthly recurring revenue (MRR) is a pure revenue metric that looks at the predictable recurring revenue for the company. MRR is calculated by taking your current number of customers and multiplying it by your average billed amount. 

So what’s the difference between MRR and NDR?

While MRR looks at every customer on the books—including newly acquired customers—NDR only calculates existing customers. 

Why is this important? 

Say your company is doing a great job putting on new clients. They’re signing up at an exciting rate, at average subscription prices. That’s great news, right?

Yes, but only if you’re also retaining your existing customers. 

If you’re churning through customers as quickly as you’re bringing them on, you’re really only treading water.

Because MRR doesn’t distinguish between new and existing customers, just looking at monthly recurring revenue won’t give you the heads up that your customer retention is leaking cash. 

NDR takes new customers out of the equation, offering a clear view of revenue activity for just your existing customers.

Why should you track your net dollar retention?

As mentioned above, net dollar retention shows you the revenue activity of your existing customers over time. This is important because existing customers represent up to 65% of your business.

NDR offers the most transparent view of growth within your existing base. It can help you head off retention issues that can take a toll on your revenue long-term. 

Net dollar revenue may also serve as a  secondary success metric for your product, customer service, sales, and support teams. Stability and growth in your existing revenue streams suggests these teams are doing everything they can to enhance the customer experience.

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How is net dollar retention calculated?

Net dollar retention is expressed as a percentage. It is calculated as follows: 

NDR = (MRR + Expansion - Downgrades - Churn) / MRR x 100

For a practical example: 

  • Say our average monthly recurring revenue on a software product is $50,000. 
  • During the month, we add $5,000 in expansions. 
  • A few customers reduced their service to a lower tier, resulting in $2,000 in downgrades.
  • We churned 5% of our customers, totaling $2,500.

All told, we lost ($4500) and gained $5000 for a net gain of $500.

The formula looks like NDR = ($50,000 + $5,000 - $2000 - $2,500) / 50,000 * 100

So our NDR is 101%. 

Great! An NDR result above 100% is called positive net dollar retention. It means the existing revenue stream is growing. (Well done!)

If your calculation results in a number less than 100%, this indicates your existing revenue is shrinking. Time to make some adjustments to your retention programs. That’s okay, we have some ideas for you below.

6 ways to boost your net dollar retention metric

Net dollar retention is a helpful metric because it avoids the “just sign more customers” approach to boosting MRR. Using NDR as a barometer for your other activities encourages teams to take an objective look at these programs and make adjustments.

Here are five areas that can help boost your NDR:

1. Release new product features

While yes, there’s an opportunity cost to feature improvements, the revenue-boosting power of updates makes it a worthwhile investment in terms of customer retention.

Committing to feature releases—especially those driven by customer input—gives existing customers more incentive to stick with your product.

It may also attract new customers to boost your overall MRR numbers. 

2. Educate your customers about your product

Customers that feel empowered to use your services often stick with a program, tool, or service longer. Building a well-crafted customer education program increases adoption, leads to upgrades, and creates more customer loyalty and confidence. Examples of customer education include:

  • Onboarding programs
  • Training events and resources
  • Periodic webinars and refresher courses
  • Feature and upgrade explainers
  • Interactive user forums
  • Searchable support resources

3. Engage with existing customers

To build stronger relationships with your customers, you need to talk to them. Increasing your engagement with your existing customer base may increase revenue over time. As an example, at Cube, we engage with our clients and wider audience through our Strategic Finance Pros Slack Community. 

There are many ways to interact with your loyal customers and fans: 

  • Marketing communications
  • Direct account touchpoints
  • Feature and support surveys
  • Beta and early access programs
  • Renewal and upgrade reminders
  • Customer loyalty programs

4. Boost customer success and support 

The inflection point for many customer relationships happens when things aren’t going smoothly. Investing in top-tier CS and support programs is at the heart of any retention strategy. If you take care of your customer when they need it most, they will reward you with long-term loyalty and revenue. 

Customer service teams can improve retention by scheduling regular check ups with accounts. This gives clients the opportunity to get questions answered and address potential issues.

Support teams can offer robust contact options, including AI assistants, live 24/7 support contacts, and multiple support channels (like live chat, telephone support, email, Slack, etc.)

5. Identify at-risk accounts

Stop churn before it starts. Develop a continuous reporting program to identify and rehabilitate churn risk before it reaches the point of no return. Analyze your current customer base for indicators of near-term churn potential, such as:

  • Changes in usage
  • Reduced customer engagement
  • Account status changes
  • Negative customer service interactions
  • Tier or feature attrition 

6. Look for upgrade candidates

On the flip side, analyze your accounts for opportunities to engage with high usage accounts. In many cases, starting a conversation about the benefits of upgrading can open doors to stronger customer relationships and increased revenue. 

Look at recently churned accounts and use these as a basis for “red flag” criteria in your current accounts. Customer feedback and social media chatter may also give context to churning accounts. Develop win-back strategies to deal with at-risk accounts before they defect.

Bottom line: pay attention to net dollar retention

Net dollar retention is an essential metric for all SaaS businesses. 

After all, increasing NDR also increases your customer lifetime value (LTV), another metric you need to know to make accurate forecasts.

So now we want to hear from you. What strategies are you going to try out to increase your own NDR? 

Share this on LinkedIn or post in Strategic Finance Pros to keep the conversation going.

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