Understand net dollar retention (a key customer success metric), how to calculate it, and what it says about the health of your business.
December 14, 2021
If you’re leading a SaaS company — especially if your model is subscription-based — there are certain essential metrics you should measure as a way to keep a pulse on your retention performance and the overall health of your business. One of those important metrics is net dollar retention (NDR).
In this article, we’ll cover what NDR is, how your company can use this metric, what this metric says about your company, how to calculate it, and what a good NDR is.
Net dollar retention (NDR), also called net revenue retention (NRR), is a metric that tells you what percentage of revenue you retained after factoring in customers’ cancellations, downgrades, pauses, and other types of revenue churn. NDR sounds similar to customer retention rate, but there are important distinctions between these metrics.
Think about this: If you have 10 customers each paying $100 per month and one customer churns, you’ve lost 10% of your customer base. You’re also down 10% on revenue. But if two of your remaining loyal customers start spending $200 per month instead of $100 per month, you’ve actually increased your revenue retention rate — even though you lost a customer.
Although you’d report a 10% loss of your customer base, the 90% that stayed is now giving you a 120% NDR — in other words, an overall positive sign for your business.
Net dollar retention can speak to the health of your business and its potential for growth. Of course, 100% NDR means your company held onto all revenue from current customers for a given period, which is a healthy goal for most SaaS businesses. But what concrete insights can you draw from this metric? Here are some key takeaways:
The higher your company’s NDR, the better. A good NDR is 100% or higher. Over 100% means growth, and under 100% means loss.
Looking at the entire SaaS industry, Blossom Street Ventures reported in 2019 that 109% NDR is the “new standard.” However, median NDRs for different types of SaaS businesses vary. For example, SaaS companies that are selling higher annual contract value products usually have a higher NDR. More specifically, 90% NDR for SaaS companies selling into small and medium businesses is considered good, while 125% NDR is a good benchmark for enterprise SaaS companies.
In another study, Blossom Street Ventures compared the NDR and gross dollar retention (GDR) of 41 different SaaS companies at the point of each company’s IPO and found that high NDRs (100% and up) point to long-term success:
“The lesson is [that] keeping customers is important, but not as important as keeping and upgrading your target customers. One of the biggest drivers of value in SaaS is showing that you’re not only keeping the customer base, but they’re also a source of new revenue driving growth in business.”
Now that you have an idea of what NDR your company should strive for, let’s dive into how exactly to calculate NDR. You’ll need to gather the following data in dollar amounts:
Then, insert those figures into this formula:
Net dollar retention = (Revenue at the start of a given period + upgrades - downgrades - churn among your existing customers during the period) / Revenue at the start of a given period
Although you plug in dollar amounts, the resulting number will be a percentage. Here’s a quick example calculation: If your company started with $200,000 in annual recurring revenue, added $15,000 in upgrades and expansions and lost $5,000 to downgrades and $7,000 to churn, your NDR calculation would look like this:
Net dollar retention = ($200,000 + $15,000 - $5,000 - $7,000) / $200,000
= 101.5% NDR
NDR does have the potential to be misleading if calculated incorrectly. When using NDR to assess the growth rate of your company, there are a couple things to keep in mind. First, make sure the numbers in your NDR calculation are all from the same period of time. Don’t pull an annual total from 2019 and another from a one-month period in 2021 and expect a good snapshot of growth or losses.
Second, make sure you’re accurately tracking other key metrics related to revenue growth alongside your NDR, such as churn, customer retention, customer acquisition costs, and customer lifetime value, to name a few. Using any one metric in a vacuum won’t give you a comprehensive picture of your company’s health.
As you start to analyze your company’s net dollar retention, you’ll inevitably look for areas of your business where you can maximize NDR. One of the best places to start is with your company’s onboarding process — and Arrows can help.
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