SaaS companies need repeat customers. After all, the definition of a SaaS business is one that delivers a service, usually through subscription, to be used by a customer repeatedly over time.
To succeed and grow, SaaS companies need to focus on the retention, engagement, and potential of their existing customers. That’s in part because acquiring new customers is hard, as well as expensive and time-consuming. Leveraging customer success as a true revenue driver relies on delivering mutual value.
Data proves it. According to Gartner, customers who get value from an interaction with a vendor’s customer success team are 82% more likely to renew their subscription and 97% more likely to share positive word-of-mouth endorsements about the company. In other words, great customer service has the power to unlock recurring revenue and customer loyalty.
That’s where net dollar retention comes in. A revenue metric that essentially recalculates your annual recurring revenue (ARR) to incorporate growth and customer churn, NDR shows you how well your business keeps, engages, and upgrades your customers—demonstrating your business’s current health and viability. It’s also a critical SaaS metric for investors, as they look to determine an appropriate valuation based on your business’s growth rate and potential for long-term success.
What is net dollar retention?
Net dollar retention (NDR), sometimes referred to as net revenue retention (NRR), measures how much your annual recurring revenue or monthly recurring revenue (MRR) has grown or shrunk over time by factoring in customer expansion as well as negative churn and downgrades. It offers a holistic picture of how well you keep, engage, and grow your existing customer base, as a gauge of your business’s overall health and viability.
Because it looks at your revenue through this broad lens, NDR highlights the importance of a unified revenue operations team. Customer satisfaction—and, as a result, revenue—is depicted as an amalgam of sales, marketing, finance, product, and customer success efforts. The C-suite has a stake, too. A great NDR percentage indicates a highly functional, deeply aligned revenue team that is well positioned for continued success.
Net dollar retention definition
Net dollar retention is defined as a percentage that reflects how your annual recurring revenue has grown or shrunk within a defined time period. It’s calculated by taking your starting annual recurring revenue (ARR) number, adding in any new subscriptions and upgrades, subtracting any churn, and dividing the resulting number by the original ARR.
You can also calculate NDR using monthly recurring revenue (MRR) instead of ARR to narrow your timeframe and get a more up-to-the-minute snapshot of your business.
Net dollar retention explained
At its core, NDR reframes customer success as a truly cross-functional initiative, as well as a revenue driver. Focusing on NDR reflects a focus on customer satisfaction, adoption, and value realization throughout every part of your organization.
“NDR is based on a simple concept: Happy customers are more likely to stay, renew, increase usage and adoption, and expand their business with you, which means more revenue over time,” says Conor Nolen, global vice president for account management at Clari. “On the flip side, frustrated customers are more likely to reduce their spend or even churn. Your NDR encapsulates all of this and quickly indicates to your revenue team—and to potential investors—how healthy your business is.”
Why is the net dollar retention (NDR) metric important for SaaS?
SaaS businesses are driven by subscriptions—the number of customers who commit to using your product or service for a defined period of time (typically one year or longer).
NDR is a critical metric for SaaS companies because it measures not only their customer retention, but also their ability to keep those customers engaged and deliver innovations that help them meet or exceed their business goals.
Creating new subscriptions is difficult and expensive, so SaaS businesses interested in growth opportunities beyond sales alone should consider cross-selling, upselling, and offering new products and services to their existing customer bases. These activities lead to valuable and cost-effective expansion revenue, while improving customer lifetime value (LTV).
To engage in these tactics effectively, it’s critical to understand how well you’re serving your customers, and that’s what NDR shows you: how well you’re keeping and growing your customers.
Calculating net dollar retention
Net dollar retention is a percentage of your annual recurring revenue (ARR). NDR is calculated using this formula:
Net Dollar Retention (NDR) = (Beginning ARR - Churn + Expansion) / (Beginning ARR)
What is a good net dollar retention rate?
Since net dollar retention looks at the percentage of your business that you’ve been able to keep and expand in a specific time period, a good benchmark would be a rate of at least 100%. An NDR of 100% or above means your current total ARR is greater than or equal to your beginning ARR. That happens if you’ve kept your current customers, and added cross-sell and upsell motions to grow the subscription costs your customers pay when they renew.
Net dollar retention is a key metric for companies hoping to achieve hypergrowth, succeed in private equity partnerships, and launch initial public offerings (IPOs). According to Crunchbase, the average NDR of companies that have successfully gone public is just under 107%. Anything over 120% is considered excellent. At the time of their IPOs, for example, the companies Alteryx and Okta had NDRs of 134% and 123%, respectively.
Why is NDR a different sales metric from churn, renewal, cross-sell, and upsell?
Churn, renewal, cross-sell, and upsell look at specific actions within your revenue generation strategy. For example, you can look at how many customers renewed their subscriptions, but that doesn’t tell you how many customers abandoned ship (including cancellations) or how many customers purchased additional items.
Here’s how key customer success metrics are defined:
- Renewal: A renewal occurs when an existing customer decides to continue doing business with your company over time—beyond the initial time frame of their most recent contract. Let’s say a customer signed a three-year contract with you. Before that three-year term ends, the customer signs a new contract, meaning recurring revenue for more time.
- Cross-sell: A cross-sell is a type of expansion that delivers more products to a current customer. For example, say your company launches a new product and a customer purchases that new product, thus increasing their spend with your company.
- Upsell: An upsell is a type of expansion that occurs when a current customer purchases upgrades, add-ons, or a bigger, more expensive version of their existing product. One example is a customer buying more user licenses for a product they already employ.
- Churn: Churn is customer loss. Churn may happen when the customer is disconnected from the value of a company’s products or services. When a customer churns, they might go without a solution or become a customer of another vendor.
- Churn rate: This is the rate at which a company loses customers during a specific time period, like a year or a quarter.
- Churn budget: Churn budget refers to the amount of dollars a SaaS company has estimated in potential losses during a given time period.
- Partial churn: This is when a customer reduces their spend with your company, but remains a customer in some capacity. Perhaps they reduce their number of user licenses, for example. Partial churn is also sometimes called erosion.
- Addressable churn: This type of customer loss can occur due to gaps in support, product fit, and adoption. Generally, this type of churn is seen as preventable, or addressable, because a company can take action to course correct and keep this customer.
- Non-addressable churn: Non-addressable churn refers to customer loss that is generally not preventable. This type of loss can occur when a customer’s company goes out of business, a champion leaves the customer’s business, or when a company is acquired by an organization that requires different products or processes.
NDR, on the other hand, is a holistic metric that captures all of these revenue insights, giving you a sense of how well your business performs overall. Only by examining NDR can you understand how well you keep, engage, and grow your customers. NDR offers a big-picture view of your overall customer journey and underscores the success of your go-to-market team.
How to improve net dollar retention (NDR)
NDR is the single most important metric to determine the health of your customer journey. And that journey is dependent on a cross-functional, well-aligned revenue team. How can you improve net dollar retention? Create and support a top-notch revenue team.
Here are some best practices for doing just that.
1. Connect customer health directly to revenue performance
Measuring the health of your current customers can greatly reduce churn, boost your annual recurring revenue, reduce costs, and help you grow faster through cross-sell and upsell opportunities. Healthy customers are loyal customers, and loyal customers are generally more likely to renew and increase their wallet share with you, according to Gartner.
To categorize and score the health of their current customers and deals, many companies use stoplight colors (green, yellow, and red).
- Green: Customers in this bucket are happy. They are likely to renew their contracts and grow their business with you.
- Yellow: These are generally happy customers, but they may show signs of slipping or have limited growth potential.
- Red: These customers are at risk of slipping, downgrading (reducing spend), or churning.
Several factors play into your customers’ health score designations, including general product usage, survey results, length of time as a customer, product feedback, and overall client relationship.
Ultimately, “you can’t improve what you can’t measure,” Nolen says. “Knowing the revenue values for each level of customer health gives you more insight into what drives NDR: retention, adoption, and expansion.”
Nolen recommends asking yourself the following questions:
- Why are your customers considered to be in “green” health?
- Do “green” customers renew reliably, offer more growth, sign on for longer terms, or purchase cross-sell products?
- Does your data show that a “green” customer has a higher lifetime value and increases year-over-year vs. a customer with “red” health?
- Can you identify customers in green health that aren’t engaged in active upsell or cross-sell opportunities?
This is where a RevOps platform like Clari shines. The Clari Dashboards module, for example, pulls together data and analytics from other modules, including Pulse, Forecasting, Opportunity, and Account Engagement. Having this single pane lets you easily examine the business by segment, health, risk, and expansion potential.
Learn more about how Clari can offer hard evidence as well as help you parse data in this short video.
2. Focus on customers when creating account success plans
At Generation Revenue 2021, Clari’s virtual conference for revenue leaders, David Sakamoto, vice president of customer success at GitLab, shared the importance of focusing on customers when creating account plans.
At GitLab, Sakamoto and his team collaborate with customers to build comprehensive success plans that deliver lasting value, rather than sign on to traditional static plans. It’s an ongoing relationship that meets the customers’ needs over time, Sakamoto says.
These plans should track your goals, results, executive business reviews (EBRs), customer engagements, and all relevant sales metrics, including time to value and adoption. Plans should proactively identify opportunities for expansion that are tied to the customers’ needs and strategic growth goals.
3. Connect revenue streams through technology
“RevOps technology brings increased alignment and shared visibility to stakeholders across your business,” explains Nolen. “It helps your teams eliminate duplicative work, gain new levels of data-driven insights, and harness a centralized view of everything that’s happening with any given customer.”
Clari’s RevOps platform makes data accessible anywhere and anytime by providing a shared source of truth that helps cross-functional teams stay aligned and collaborative.
Learn more about how to connect your RevOps for NDR success in this webinar featuring Nolen of Clari.
4. Leverage your existing CRM data
“A lot of rich information sits behind the CRM curtain, waiting to be applied,” says Nolen.
RevOps technology can quickly and easily help you leverage this data to improve NDR. CRM data points that a RevOps platform like Clari can help you maximize are:
- Net Promoter Score (NPS): NPS measures customer loyalty, experience, and willingness to recommend products to others. Reviewing your NPS score from a revenue perspective can help your team identify new growth opportunities or take proactive steps to build better, longer-term relationships.
- Activity Data: Account engagement insights from Clari’s RevOps platform illustrates the deal health by tracking emails, meetings, and other interactions occurring across revenue functions, including sales, customer success, support, services, and more. This not only gives you 360° visibility into the customer experience, but also delivers intelligence for improved opportunity management, forecasting, and account engagement.