Net dollar retention (NDR) is a valuable metric for businesses that want to understand revenue patterns from their existing customers. NDR offers insight into customer retention and changes in revenue due to upgrades, downgrades, and customer churn. This metric can also help companies assess their financial stability and uncover potential areas for growth and improvement.
Below, we’ll cover the basics of NDR, including how it’s defined and calculated, what it can indicate, and how you can use it to surface powerful insights about your business.
What’s in this article?
- What is net dollar retention (NDR)?
- How is net dollar retention calculated?
- Why does net dollar retention matter for businesses?
- What is a good NDR benchmark?
- How to improve NDR
What is net dollar retention (NDR)?
Net dollar retention (NDR) measures how well a business retains its existing revenue from current customers, accounting for upgrades, downgrades, and churn. NDR looks at a specific time period to calculate this number, so you can think of it as a snapshot of customer revenue health.
Here are a few key points about NDR:
- It’s expressed as a percentage.
- An NDR greater than 100% indicates that revenue from existing customers is growing.
- An NDR lower than 100% shows that a company is losing revenue from its current customer base.
- Expansions (upgrades or additional purchases), contractions (downgrades), and churn (lost customers) all factor into calculating NDR.
A strong NDR indicates that customers continue to find value in the business’s product or service, leading to potential upsells, fewer downgrades, and less churn. But a weak NDR can be a sign that customers aren’t fully satisfied.
How is net dollar retention calculated?
To calculate NDR, consider both positive and negative changes in customer revenue during a specific time period.
Here’s the formula to calculate NDR:
NDR = ((Starting MRR + Expansion − Contraction − Churn) ÷ Starting MRR) × 100%
Here’s what each of these terms means.
- Starting MRR: This is the monthly recurring revenue at the beginning of the period.
- Expansion: This is any additional revenue from current customers due to upsells or cross-sells.
- Contraction: This is any decreased revenue from downgrades by current customers.
- Churn: This is all lost revenue from customers who ended their subscription or contract.
Why does net dollar retention matter for businesses?
Businesses can use NDR to gauge their financial health in relation to their existing customer base. It provides actionable insights on revenue trends, growth strategies, and customer satisfaction.
What NDR indicates
Revenue stability: A consistent or growing NDR indicates that a business is either maintaining or increasing its revenue from its existing customers.
Cost efficiency: A high NDR suggests that the business is maximizing its revenue from its current customers. This signifies that the business is employing a cost-effective growth strategy, since acquiring new customers often costs more than retaining existing ones.
Customer satisfaction: Calculating NDR requires examining whether customers are upgrading and maintaining their contracts, or whether they’re downgrading and leaving. The former indicates that customers are satisfied with the business and finding value from its products or services, while the latter indicates issues that may need addressing.
Perceived value: A high NDR often means customers are realizing value from a product or service. They might be using more features, integrating the service deeper into their operations, or simply finding more utility as they continue their subscription.
Upsell and cross-sell opportunities: NDR can indicate whether upsell and cross-sell strategies are effective. If the expansion revenue is strong, it’s an indication that customers are interested in purchasing more services.
Impact of NDR on businesses
Strategic planning: Staying up-to-date on the NDR can help businesses make informed decisions. A declining NDR could lead a business to reevaluate product features, pricing models, or customer service initiatives.
Investor attraction: A strong NDR can be attractive to potential investors. It shows that the business has a solid foundation and isn’t overly reliant on acquiring new customers for growth.
Resource allocation: A low NDR might mean that a business should redirect resources from acquisition strategies to retention strategies, such as improving product training, enhancing support, or launching loyalty programs.
NDR highlights how a business interacts with its existing customers. It provides a road map for future growth and informs businesses on how to best invest their time and resources. Businesses aiming for sustainable growth can learn a lot by using NDR to inform strategy.
What is a good NDR benchmark?
Net dollar retention benchmarks can provide businesses with a relative measure of their performance against industry standards or their peers. A 2022 OpenView report found that the median NDR for SaaS companies of different sizes ranges between 100% and 111%. But what qualifies as a “good” NDR benchmark?
Understanding NDR benchmarks
Greater than 100%: An NDR above 100% indicates that a business is growing its revenue from existing customers. This means the company is not only retaining its current customers, but it also is effectively upselling or cross-selling to them. This is generally seen as an excellent position to be in.
Close to 100%: An NDR close to 100% suggests the business is holding steady. It is retaining existing customers, but it might not be experiencing much expansion revenue. It’s a stable position and might demonstrate the potential for further growth.
Less than 100%: An NDR below 100% means that a business is losing revenue from its existing customer base due to customers churning or downgrading their subscriptions. It’s a sign that there might be product, service, or relationship issues that need attention.
Factors affecting the ideal benchmark
Industry standards: Different industries may have different NDR benchmarks. What’s considered good in one sector might be substandard in another. It’s beneficial to compare NDR against industry peers.
Business model: Subscription-based models, especially in the tech sector, often target an NDR above 100%. Other business models might have different standards.
Growth stage: Startups and rapidly growing companies might prioritize customer acquisition over expansion, leading to a lower initial NDR. Established businesses, with a larger customer base, might be more focused on expansion and aim for a higher NDR.
Economic climate: External factors, such as economic downturns, can affect customer spending patterns. During such times, a lower NDR benchmark makes sense and reflects the external environment rather than business performance.
While an NDR above 100% is generally positive, businesses should set benchmarks based on industry standards, the company’s growth stage, and the prevailing economic conditions. And businesses should consider NDR alongside other metrics for a comprehensive view of business health.
How to improve NDR
Businesses aiming to retain their existing customer base and grow revenue from these customers should focus on improving net dollar retention. If you’re trying to increase NDR, consider taking the following actions in your business:
Customer success initiatives: Invest in a strong customer success team that helps customers achieve their desired outcomes with your product or service. This helps retain customers, and it increases opportunities for upsells.
Upselling: Continuously provide value-add opportunities that give customers a reason to upgrade. Customers are more likely to upgrade if they see a clear and relevant benefit that solves genuine customer challenges.
Training and onboarding: Craft a well-structured onboarding process that shows customers how to derive value from your product from the start. This makes customers less likely to leave, reducing churn.
At-risk customer engagement: Use analytics to identify customers who might be at risk of downgrading or churning, and reach out to proactively address their concerns.
Community engagement: Enable customers to engage with one another, share best practices, and become advocates for your business. This can help retain customers and also create opportunities for cross-selling.
Pricing strategy updates: Regularly evaluate your pricing strategy, especially if customers are consistently downgrading. This may indicate that they don’t perceive enough value at higher tiers, and adjusting features or pricing may help.
Feedback loops: Implement regular feedback mechanisms to better understand what customers like about your product and what they don’t. Address these concerns to increase contract values and reduce downgrades.
Contract reviews: Before renewals, review contracts with customers to learn more about their evolving needs and how your product or service can meet them. This allows you to negotiate terms that benefit both parties.
Improving NDR isn’t just about retaining revenue—it’s also about growing revenue from your existing customer base. By refining customer engagement, adding value, and making other feedback-driven improvements, businesses can boost their NDR—creating a deeper connection with their customers and growing revenue.