Net Dollar Retention (NDR)

How to Calculate Net Dollar Retention (NDR)

NDR—an abbreviation for “Net Dollar Retention”—is a key performance indicator (KPI) for SaaS and subscription-based companies.

The importance of NDR as a SaaS KPI stems from its ability to measure customer retention and the company’s success (or failure) at retrieving more incremental revenue from existing customers.

The net dollar retention (NDR), often used interchangeably with the term “net revenue retention (NRR),” is of particular importance in the SaaS industry because the metric not only a measure of customer retention but also a company’s ability to maintain high engagement and continuously improve its current offerings to meet (and exceed) the needs of its customers.

In practice, a higher NDR indicates that customers receive positive economic value in the company’s product or service offerings, contributing to increased customer loyalty and a higher customer lifetime value (CLTV).

The ability to acquire new customers is just one piece of the puzzle, with the other being the long-term retention of those customers and facilitating more expansion revenue.

While acquiring new customers is vital for growth, of course, retaining existing customers and encouraging them to spend more is equally crucial.

Striking the right balance between expansion revenue and churned revenue ensures sustainable, profitable growth (and long-term success), which is especially important in the later stages of the lifecycle.

Why Does the NDR Matter in SaaS?

By analyzing the net dollar retention (NDR), a SaaS company can identify areas for improvement and develop honed data-driven, targeted strategies to enhance customer retention further and drive additional revenue.

For instance, identifying and fixing the issues behind past customer churn can lead to actionable changes that will reduce churn rates while highlighting the specific upselling tactics to continue to employ (i.e. understand which strategies resonate with the target end market most).

Broadly, a consistent stream of recurring revenue from subscription or multi-year contracts is necessary for SaaS companies to sustain current (and future) growth.

In short, generating more recurring revenue provides financial stability and predictability, allowing companies to plan and allocate capital in the right places (i.e. higher return on investment).

With that being said, a low churn rate (long-term customer relationships) creates a stream of recurring revenue, which is a function of high retention rates, constant engagement, and tangible improvements post-feedback.

Building solid, long-term relationships with customers and brand loyalty improves the odds of achieving a higher NDR via increased opportunities for upselling and cross-selling (and less revenue lost from customer churn and downgrades).

Net Dollar Retention Formula (NDR)

The formula to calculate the net dollar retention (NDR) equals the beginning MRR plus expansion MRR minus churned MRR, which is then divided by the beginning MRR.

Expansion and churned revenue are the two core drivers influencing a company’s recurring revenue (thus, optimizing these factors is crucial to improving NDR).

• Expansion Revenue ➝ Expansion revenue reflects the company’s ability to increase revenue from existing customers through various strategies, such as offering additional products or services, encouraging upgrades, or implementing tier-based pricing (e.g. Upselling, Cross-Selling, Upgrades).
• Churned Revenue ➝ Churned revenue represents the loss of revenue due to customers leaving or downgrading their accounts (e.g. Cancellations, Non-Renewals, Downgrades)

By minimizing churn, a SaaS company can maintain a high NDR, whereas expansion MRR serves to offset the negative impact of churn, which is an inevitable risk within the SaaS and subscription-based business model.

Usually, NDR is expressed as a percentage for comparability purposes, so the resulting figure must then be multiplied by 100. Expressing NDR as a percentage allows a more fair “apples to apples” comparison across different peer companies and historical periods.

The calculation of NDR consists of dividing the current MRR from existing customers by the MRR from the existing customer base in the prior period, offering a practical perspective and crucial insights on maintaining and growing revenue from existing customers.

What is a Good Net Dollar Retention (NDR)?

As a general rule of thumb, an established SaaS company with a sound business model should have an NDR that exceeds 100% (or 1.0x).

An NDR above 100% signifies that the company is not only retaining its customer base but also generating additional revenue, which is a positive sign of sustainable revenue growth and customer satisfaction.

If the NDR exceeds 100%, the company will likely expand rapidly while remaining efficient with its spending and capital allocation relative to competitors with a lower NDR. A high NDR suggests that the company effectively manages its resources and delivers value to its customers, leading to increased revenue and growth.

A higher NDR indicates successful expansion efforts and strong customer relationships, whereas a lower NDR signals potential customer retention and satisfaction issues, which must be addressed to ensure long-term success.

• NDR >100% ➝ Greater Recurring Revenue from Existing Customers (i.e. Expansion MRR)
• NDR <100% ➝ Less Recurring Revenue from Churn and Downgrades (i.e. Churned and Contraction MRR)

Thus, a SaaS company with an NDR in the ballpark of 100% is perceived positively (i.e. the company is on the right track and headed in a more favorable trajectory).

Achieving an NDR of around 100% demonstrates that the SaaS company effectively balances customer acquisition and retention efforts.

The market-leading SaaS companies can far exceed an NDR of 100% (i.e. NDRs of >120%), but most set a target of around 100%.

While exceeding 100% is ideal, maintaining an NDR close to this benchmark is nonetheless a strong indicator of the sustainability of a SaaS company’s current business model (and growth potential).

In short, the higher the NDR, the more secure a company’s outlook appears, implying that the customer base must receive enough value from the provider to remain. A high NDR reflects a company’s ability to deliver consistent value, leading to long-term customer loyalty and financial stability.

Improving NDR stems from understanding not just newly acquired customers but also maintaining close relationships with existing customers, thereby focusing on existing customers and their needs, which can lead to higher retention rates and increased opportunities for expansion revenue.

Even churned customers can be informative, as a company could analyze the feedback and survey them to determine the reasons for the cancellation, leading to actionable insights (and user retention strategies) to prevent future cancellations going forward.

In fact, learning from churned customers can provide valuable feedback for improving products and services, ultimately enhancing customer satisfaction and retention relative to feedback from customers who are more receptive to its current tactics.

^{Net Dollar Retention — SaaS Industry Benchmark (Source: Meritech Capital)}

Gross Retention vs. Net Retention: What is the Difference?

The difference between gross retention and net retention is crucial to fully grasp the performance of a SaaS business in terms of reducing customer churn and improving expansion revenue.

By analyzing both retention metrics, companies can analyze historical data on customer churn, retention, and the effectiveness of specific strategies to improve expansion revenue, identify areas for improvement, and develop honed strategies to establish a sustainable revenue model and improve customer satisfaction.

• Gross Retention ➝ The gross retention rate (GRR) refers to the total revenue retained from existing customers within a specific period.
• Net Retention ➝ In contrast, the net retention factors in any lost revenue due to churn, downgrades, or cancellations.

The formula to calculate the gross revenue retention is as follows.

The missing component in the gross revenue retention (GDR) formula—which represents the distinction from the net revenue retention (NRR) metric—is the exclusion of expansion MRR.

Net Dollar Retention (NDR) Calculation Example

Suppose a SaaS company generated $100k in monthly recurring revenue (MRR) from its existing customer base at the start of the month.

By the end of the month, the company managed to upsell additional services to some of its customers, resulting in an expansion MRR of $20,000.

On the other hand, the company experienced some customer churn, as anticipated, leading to a churned MRR of $10,000 in the coinciding period.

If we insert our assumptions into the net dollar retention (NDR) formula from earlier, we arrive at an NDR of 110% (or 1.1x).

• Net Dollar Retention (NDR) = ($100,000 + $20,000 − $10,000) ÷ $100,000 = 1.1x (or 110.0%)

Therefore, our SaaS company’s NDR is 110%, indicating that it has not only retained its existing customers but also generated an additional 10% in revenue from them.

To reiterate from earlier, an NDR of more than 100% (or 1.0x)—a condition met by our hypothetical company—implies that the company is effectively managing customer relationships and successfully implementing strategies to increase revenue from its existing customer base.

Why? A consistently high NDR, such as 110%, reflects customer satisfaction and loyalty and the company’s ability to deliver positive value via its product offering.

In closing, our NDR calculation exercise provides a comprehensive view of a company’s performance in retaining and expanding revenue from its existing customers, highlighting the importance of focusing on retention and expansion efforts to achieve sustainable growth.

Hence, ensuring high net dollar retention (NDR) is crucial for SaaS and subscription-based companies to monitor and optimize closely.