Gone are the days of simply tracking net-new revenue or negative churn. While important, these metrics on their own don’t illustrate the full health of your business. After all, your existing customers could jump ship or opt for service downgrades as quickly as you’re gaining new customers, setting you up to crash and burn. Or you could be missing out on key opportunities to upgrade and cross-sell to your existing customer base, limiting your growth potential.
It’s only when you look at stats like revenue and churn in aggregate—through net dollar retention (NDR)—that they help paint a clear picture of your business. Here’s how.
What is net dollar retention (NDR) benchmarking?
Understanding how your software company stacks up compared to your competitors, peers, and similar businesses is crucial—not only for understanding what’s possible, but also because net dollar retention rate is quickly becoming one of the most important SaaS metrics for company valuation. As such, benchmarking net dollar retention in SaaS businesses provides a critical baseline against which your company’s NDR can be measured.
Net dollar retention, explained
Net dollar retention, sometimes called net retention rate or net revenue retention, offers a snapshot of how well you keep and grow your customers, ultimately revealing the health and longevity of your business.
How can NDR do that? Consider the following scenarios:
1. Leaky-bucket syndrome: Let’s say you see your total revenue increasing due to an influx of new customers. But you also see many existing customers churning due to poor customer service or other customer experience issues. Perhaps you're losing business because your existing customers are downgrading, spending less with you. Those losses will quickly catch up with you, and your annual contract value (ACV) will begin to slip.
“If you have a leaky bucket, and you’re losing as many customers at the bottom of the bucket as you are adding at the top of the bucket, then you are not going to grow,” explains Yamini Rangan, CEO of Hubspot and former Chief Customer Officer at Dropbox, in the first episode of the Masters of Revenue series.
2. Leaving money on the table: Your company enjoys a low churn rate. That’s good news, right? But if you’re only renewing and not also upselling or cross-selling, that churn rate isn’t telling you that your existing customers have limited growth potential. Without the possibility of upgrades, your customers' lifetime value (LTV) is low and your revenue growth, as well as your pricing potential, will stagnate.
“It is about that holistic picture of not just the customers you’re adding, but also how you are renewing, how you are engaging, how you are upselling,” Rangan explains. “You want that to be in the DNA of the company— looking at the overall picture.”
Neither of these scenarios points to a business that's healthy in the long term.
Net dollar retention considers all of these data points holistically to provide you with a clearer picture of how well you’re retaining, maintaining, and expanding your customer base. NDR ultimately indicates if your business is well-positioned for long-term growth.
Why is NDR the new critical metric for SaaS in 2022?
Jeff Depa, Gainsight’s Chief Revenue Officer, spoke at Generation Revenue 2021, Clari’s virtual conference for revenue leaders, about how the 2020 market volatility has propelled customer retention metrics and KPIs like NDR to the forefront.
“If this past year has taught me anything, it’s the importance of having a defined approach to retention and expansion that goes well beyond just defense,” says Depa.
In other words, retaining customers is your best bet for creating a healthy business model that can weather any storm, from a market downturn to a global pandemic. For example, Bain & Company found that a 5% increase in customer retention can produce more than a 25% increase in profit.
Additionally, acquiring a new customer, measured by the metric known as customer acquisition cost, or CAC, is anywhere from five to 25 times more expensive than retaining an existing one, according to Harvard Business Review.
How do you calculate net dollar retention?
Net dollar retention is calculated as a percentage of your annual recurring revenue (ARR). You can calculate NDR with the following formula:
Net Dollar Retention (NDR) = (Beginning ARR - Churn + Expansion) / (Beginning ARR)
You could also calculate NDR using monthly recurring revenue (MRR) to get a narrower, more up-to-the-minute snapshot of the health of your business.
What are the benefits of net dollar retention benchmarking?
By benchmarking net dollar retention in your company and throughout your industry, you gain a key metric for measuring your business performance. You can continually assess the health of your business and the success of your customer success team.
What is a good net dollar retention benchmark?
Determining a good net dollar retention benchmark for your organization requires clearly defining your goals. Every business wants to see a rate of at least 100%, because that means you’re not only keeping, but also growing—through cross-selling or upselling—your current customers.
That said, your target NDR will be higher if you’re hoping to attract private equity firms, achieve hypergrowth, or go public.
Sammy Abdullah, co-founder of Dallas-based venture capital firm Blossom Street Ventures, found that the median NDR of companies successfully launching an initial public offering was 109%. Crunchbase puts that figure at 107%.
Both sources agreed that anything over 120% is an excellent growth rate. Abdullah notes that startups like CrowdStrike and PagerDuty held an average net retention rate of 139% at IPO. The top 20 companies that went public between 2012 and 2019 had an average NDR of 122%. According to Crunchbase, Alteryx and Okta had NDRs of 134% and 123% at the time of their respective IPOs.
How to improve NDR with a RevOps platform
Clari's RevOps platform is purpose-built for teams to optimize their sales effectiveness and customer retention. That’s because a RevOps platform helps you:
- Create a shared source of truth. A RevOps platform keeps go-to-market teams aligned and collaborative, meaning you can count on predictable revenue that empowers better business decisions about personnel, investment, growth, and more. Learn more about the advantages of connecting your RevOps in this webinar featuring Conor Nolen, Clari’s Global Vice President of Account Management.
- Connect customer health to revenue performance. The best RevOps platforms automatically capture and analyze critical sales metrics to provide data-driven, actionable insights you can use to improve your revenue performance. Learn more about how Clari can help you sort through data and uncover key insights in this short video.
- Boost your customer engagement and success. As revenue professionals, we always like to think we’re customer-focused, but RevOps platforms can help us take customer-centricity to the next level. RevOps technology allows you to create individualized, data-backed account plans to ensure long-term customer success and identify the right expansion opportunities. That’s a surefire way to create loyal customers who will stick with you as they grow their business alongside yours.
All of these initiatives are critical elements of your customer retention and engagement strategy. They also help you improve your net dollar retention rate and boost your company NDR benchmark, setting you up as a leader in your industry.