A SaaS business is like a child.
You nourish and provide for it in its early years, constantly giving it what will make it grow.
But like all children, a SaaS business too must learn how to make things work out by and within itself.
You can still provide it with more.
But if it can’t function on its own, it’ll never be healthy.
I’m talking about customer acquisition and customer retention: If you feed your business with new customers and don’t give it what it takes to keep current customers, it will never work.
So, what will make it work?
Net dollar retention 💰
Let’s dive deep into:
- What net dollar retention (NDR) is,
- Some differences between other key metrics (CMRR, MRR, ARR, GDR),
- What the difference between GDR and NDR is,
- How to calculate your net dollar retention,
- What a good net dollar retention rate is,
- Why NDR is an essential metric to track, and
- Some tips to consider before and after starting out with NDR
Don’t have the time?
Here’s the short version:
- Net dollar retention is a metric that looks into the fluctuations going on in your existing customer base.
- CMRR is a metric used to project into the future, that uses monthly recurring revenue, a metric to consider past performance, to do it.
- Net dollar retention and gross dollar retention essentially differ in one way: GDR doesn’t include upgrades in its calculation while NDR does.
- To calculate your NDR, the formula is: NDR = (Revenue at the start + upgrades – downgrades – churn) / Revenue at the start
- A good NDR is generally over 100%, but top companies keep it above 120%.
- NDR is important because:
- It is essential for tracking customer retention,
- It is attractive for VCs and acquirers,
- It is simple and actionable,
- It helps detect risks early
- Some good tips to follow for a high NDR are:
What is Net Dollar Retention (NDR)?
Net dollar retention (NDR) or Net Revenue Retention (NRR) is a SaaS metric to monitor the fluctuations within your existing customer base in a given time period. The metric is generally deemed a reliable metric to see healthy growth rate by investors since it accurately displays the changes in recurring revenue over time according to upgrades, downgrades, and churn.
To put it simply, NDR tells you how much revenue churn or growth you have in a period of time, coming directly from existing customers.
Then, what is CMRR that we can’t seem to get enough of?
What is Committed Monthly Recurring Revenue (CMRR)?
Committed Monthly Recurring Revenue (CMMR) or contracted monthly recurring revenue, is a SaaS metric used to consider the monthly recurring revenue (MRR) in a forward-facing way. While monthly recurring revenue (MRR) calculates the monthly subscription revenue to project on the past performance of a business, CMRR is used to anticipate the MRR in the future.
MRR shows the monthly growth of the company in more detail and helps you measure the new pricing strategies immediately.
For a SaaS business, CMRR projects MRR in the future period by taking into account the revenue expansion and anticipated churn.
Similarly, annual recurring revenue (ARR) can be used to look into the yearly performance of a business. With ARR, you can see the yearly progress of your company, thus making long-term planning and creating road maps.
So, both ARR and MRR essentially help CMRR be more accurate and actionable.
Here is the formula for CMRR:
CMRR = MRR + Guaranteed Expansion MRR – Downgrade CMRR – Churned CMRR
Keep in mind, though:
👉 CMRR is a future-oriented metric so it only applies when calculated for future periods where further expansion and customer churn haven’t happened.
👉 Yes, CMRR is crucial and it tells a lot about the success of your business but if you want an all-around understanding of your success, then you should not only be focused on CMRR.
For example, you may have a month in which your CMRR is contracted but your NDR grew.
This can happen because many customers fail to renew but the retained customers upgrade their accounts in that specific month.
And while we’re at it, let’s clear up one more metric we look into for a sign of growth:
Net Dollar Retention (NDR) vs Gross Dollar Retention (GDR)
Both gross dollar retention and net dollar retention are very important metrics to track the success in achieving growth but there is a fine difference between the two.
Gross dollar retention shows you how much of the customer you keep year over year without taking the upgrades into consideration.
Here’s the formula:
(beginning MRR — downgrades — churn) / by beginning MRR
Net dollar retention, on the other hand, includes upgrades and that’s the main difference between the two.
So, even though both metrics are essential for a consistently growing business, net dollar retention is definitely the more effective and bigger-picture metric to go with for most situations.
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How to Calculate Net Dollar Retention (NDR)
Here is the math behind net dollar retention:
NDR = (Revenue at the start + upgrades – downgrades – churn) / Revenue at the start
Let’s dig deeper into the equation and learn what expansion, downgrades, and churn means, and their roles in changing Monthly Recurring Revenue(MRR).
👉 MRR may increase with newly acquired customers or by an increase in usage within the existing customers.
An increase in the price of a subscription may also cause this.
👉 MRR may decrease by churn, customers leaving your service, or by downgrades in usage within the existing customers.
Customers who downgrade their premium subscription to a basic one would fall into this category.
For example, company X started with $100,000 in recurring revenue.
It added $25,000 worth of expansion revenue, had $10,000 worth of downgrades, and $5000 worth of churn.
After plugging in the proper figures, the calculation would look like this:
($100,000 + $25,000 – $10,000 – $5000)/$100,000 = 110% NDR
“Wow, it’s over 100% so it must be good!”, you might say to yourself.
Well, you’re partially right.
Let’s take a look at what is considered a good NDR – and what is not:
What is a Good Net Dollar Retention rate?
Here’s the logic behind net dollar retention:
👉 If your NDR is over 100%, there is an increase in revenue is from existing customers.
That means that your company can grow without gaining new customers.
👉 If your NDR is below 100%, it means that there is a decrease in revenue from downgrades and churn.
In this case, you need to make changes in your business to enhance customer experience and overall increase customer success to make sure your business can actually retain customers.
👉 Top-performing SaaS companies have 120%+ NDR and the approximate median is 106%.
So anything above 100% means you’re on the right track 🏆
Why is Net Dollar Retention Important for SaaS Businesses?
Overall, companies with good NDR that is over 100% grow rapidly and are more cash efficient relative to the ones with lower NDR.
The metric is a great KPI in showing how sticky your product is.
It illustrates your company’s value proposition and overall customer satisfaction.
In other words, it shows your company’s customer lifetime value and gives insight into the growth of your business.
And there are 3 main reasons why it is essential:
1- Perfect for Retention Tracking
Net dollar retention is one of the primary tenets of tracking how well you are performing in terms of customer retention.
It can be a valuable way of monitoring customer retention rate for customer success teams while also helping finance teams see the revenue retention rate.
2- Preferred by Acquirers and VCs
NDR is one of the foundational metrics that any investor or acquirer is going to want to know.
The customer retention rates of a business and the fact that a business is able to continuously retain its existing customer base tell a lot about revenue expansion, customer lifetime value, and growth opportunities of the business.
And thus, it is important to check NDR to see how attractive your company is in the long run.
3- Simple But Actionable
The most fascinating thing about NDR is the fact that it can be very effective and actionable using very concrete data that is easy to access for most businesses.
Since it can be easily calculated, it becomes an even more attractive and actionable metric to use.
So, by tracking NDR and other metrics to complement it, you can more clearly see the changes in growth over time.
4- Great For Detecting Risks Early
Sometimes it is possible to have net recurring revenue growth even if your customer base is decreasing.
It happens when the revenue from newly acquired customers exceeds the reduction in revenue from existing customers.
For example, a company may start the month with $100,000, book $50,000 in new subscriptions but not have any change in expansion revenue, $20,000 in downgrades, and $5000 in churn.
Here, MRR increased from $100,000 to $125,000 but NDR is %75.
This means you have a hole in your business that you’re leaking money from!
So, NDR enables you to gain insight into such situations and keep the situation under control.
And finally, let’s talk about some quick tips to increase your NDR:
Quick Tips to Increase NDR
There are many different ways to increase NDR for subscription businesses and many are quite specific to each business.
Here are 3 that can work for all:
1- Focus on Customer Success
Customer success is the main factor for any business’ customer lifetime value and revenue churn.
So, there is much for customer success teams to do to make sure:
👉 Customer churn rates are low,
👉 Customer journeys are optimized,
👉 Customer revenue increases through upgrades,
👉 Downgrades are only done when necessary, and
👉 Overall customer satisfaction is high
2- Offer Excellent Customer Service
Half of keeping customer retention and thus, customer success high is offering excellent customer service and support.
Customer support and service being the first touchpoint when customers are having a problem, it can be detrimental to overlook offering agile and effective customer support.
3- Add Other Metrics to the Formula
As we discussed above, only using NDR might be misleading, even though it is definitely a foundational metric.
So, it is wise to bring in other metics to create a bigger framework in which business processes and growth rate tracking can take place.
Some metrics and KPIs to consider are:
👉 Customer acquisition costs,
👉 Customer churn/revenue churn rates,
👉 Customer lifetime value,
👉 Operating costs,
👉 Gross dollar retention (GDR)
And more, check out our customer success metrics article here 👈
To Wrap Up…
Tracking customer success can require a lot, but whatever your business model or pricing model is, net dollar retention is often a good metric to monitor how healthy your business is.
It can also help detect blind spots in real-time, increase expansion revenue, and actively fight customer churn.
So, this is your sign to give NDR the priority it deserves!
Frequently Asked Questions
How do you calculate customer retention rate?
You should keep in mind that Net Dollar Retention and Customer Retention are different metrics. The customer retention rate is calculated as follows:
[(CE – CN) / CS] x 100CE – the number of customers at the end of the period measured
CN – the number of new customers during the period
CS – the number of customers when the period started
Does Net Dollar Retention include new customers?
No, it does not. NDR focuses on the existing revenue base.
Does Gross Retention include downsells?
Yes, it does. By definition, Gross Revenue Retention focuses on the starting revenue of your business minus any revenue you lose through downsells or churn.