Net Dollar Retention Definition
Net Dollar Retention measures the changes in recurring revenue caused due to fluctuations within the revenue from the existing customer base.
It takes into account how much revenue the company generated from its existing customers at the beginning of the period. Including as well as how much it generated from those same customers at the end of the period.
The formula to calculate Net Dollar Retention is:
Where, within a given period (usually a year) and for existing customers:
- Starting ARR; total revenue generated during the previous year
- Expansion; upsells, cross-sells, add-ons generated during the Year
- Downgrades; reduction in plans, number of seats, number of tokens, etc. It’s also referred as “Revenue Churn”
- Churn; amount of revenues which is not renew at the end of the Year because customers are leaving. It’s the classical “Customer Churn”
How to interpret Net Dollar Retention Rate?
The interpretation is quite intuitive:
NDR > 100% indicates that beyond retaining all of your existing customers, you are generating additional revenue from them through upselling, cross-selling, or other means. Your solution appears to be strong, customers are willing to continue using and paying for it. It is a good indicator of a company’s long-term revenue growth potential
NDR = 100% means that you are retaining all of your existing revenue from your customers. But you are not generating any additional revenue from them (maybe the first sign of the incoming erosion)
NDR < 100% suggests that you are losing revenue from your existing customers (Downgrades are higher than Expansion) and/or you are losing customers (Expansion did not compensated both Revenue and Customer Churns). Having a deep understanding on each metric is important for Root Cause Analysis (dissatisfaction, competition, etc)
How to benchmark yourself?
There is no one Golden NDR rate that fits for all vendors!
It varies widely depending on the industry, customer base, and other factors. So it’s important to compare a company’s net dollar retention rate to its peers in the same industry to get a more accurate benchmark.
The last study published by SaaS Capital (accessible here) gives an interesting view of Median (Net) Dollar Retention split per Annual Contract Values.
Why should I add this new metric to my SaaS Sales KPIs?
First, Net Dollar Retention provides insight into the revenue growth potential of existing customer base. By retaining more revenue from existing customers, companies can reduce their reliance on acquiring new customers to drive growth and improve their long-term revenue predictability.
A high Net Dollar Retention rate is also a good indicator that a company has a strong product or service. It can also indicate that a company has a successful “farming strategy”. It means developing cross-selling, upselling and increasing the lifetime value of each customer.
Furthermore, Net Dollar Retention is helpful to track customers’ retention and increase their Annual Contract Values. It’s an important KPI for SaaS companies looking for a recurring revenue model and/or having a high Customer Acquisition Cost.
Last but not least, NDR is more than ever analyzed by VCs and other investors at the time to be part of a new founding round (and when done to evaluate the performance).
Conclusion
Net Dollar Retention indicates how effective a company is at retaining and increasing revenue from its existing customers.
It’s a good indicator of solution market traction, customer satisfaction and the potential for future revenue growth.