If you’ve ever taken a Marketing 101 course, you’ve learned that retaining a customer is far more profitable than attracting new customers. It’s old wisdom, but it’s still valid today. Unfortunately, many SaaS companies overlook this and focus on generating new leads. The cost of acquiring new customers becomes very high very quickly. And if you can’t link your user to your product, is completely useless. Most people judge the performance of a SaaS company by its Monthly Recurring Revenue (MRR) while evaluating a company by its Net Dollar Retention (NDR) can provide much more valuable insight.
Why? Well, it’s not uncommon for a company’s MRR to increase while its NDR decreases. In other words, the business is bleeding money.
One could argue that the NDR is much more than a number; It quantifies how your customers value or like your product and how much you affect their lives. I would say that Net Dollar Retention (NDR) is one of the most important metrics for SaaS companies.
With this in mind, upgrades or downgrades and churn should be considered when evaluating a company’s performance.
If you are looking for a guide for NRR vs GRR we have it!
What is Net Dollar Retention?
NDR is a metric expressed as a percentage. It shows the amount (change) of revenue from current users that a company can retain compared to any other time period, taking into account downgrades, upgrades, and churn.
NDR or net dollar retention is not as well known as MRR, but it is a very valuable (if not more valuable) metric. Why is NDR so important? First and foremost for me is the fact that it is very possible to increase your MRR and lose money at the same time.
This scenario happens when your marketing department is on fire. Acquiring new users creates a revenue stream that exceeds net revenue from your existing user base.
Let’s say your business starts this month with an MRR of $100,000. The company has new subscriptions of $50,000, expansion revenue of zero, downgrades of $20,000, and churn of $5,000.
In this example, your MRR has increased by 50%. And yes, that’s why you have to break out the champagne. However, their NDR is only 75%. You have lost 25% of the MRR of your current user base. What was your marketing budget? How much did you spend to attract these new users? Money is flowing from your business…
To understand net dollar retention, you need to consider expansion (via marketing), downgrades, and most importantly, churn, and how it affects monthly recurring revenue (MRR).
Before we dive into the basics of NDR, let’s explore a little more about what it means.
If you’re wondering, why is retention so important in B2B SaaS, read –Why is Customer Retention important
Increases MRR
The MRR can be increased through two main mechanisms:
- By newly hired customers
- Through increased usage or upgrades within your existing customer base
Simply put, MRR increases as your current customers spend more on your product. For example, by upgrading a standard subscription to a premium subscription. Or when your marketing department is doing a good job.
An example of the former would be upgrading a user from a basic $10 subscription to a premium $50 subscription. In this case, the revenue from the expansion would be $40 or the net increase from the upgrade.
$50 – $10 = $40 increase in MRR
Calculate Net excess in dollars
The Net Dollar Retention Rate takes into account changes in MRR caused by expansion, upgrades, downgrades, and churns within an existing customer base. It is expressed as a percentage and calculated using the following equation.
(MRR Expansion Start + (– Downgrades) – Churn) / MRR Start * 100 = NDR
For example, a business starts the month with recurring revenue of $10,000. During the month, an expansion turnover of $2,500, downgrades of $1,000, and a churn of $500 were achieved.
($10,000 + $2,500 – $1,000 – $500) / $10,000 * 100 = 110% NDR
The company now has an MRR of $11,000 and an NDR of 110%
What is a good level of Net Dollar Retention?
Because net dollar retention refers to the percentage of your business that you’ve been able to keep and grow over time, a rate of at least 100% would be a suitable benchmark. Your current total ARR is more than or equal to your beginning ARR if your NDR is 100 percent or higher. If you’ve kept your existing customers and added cross-sell and upsell motions to increase the subscription costs your customers pay when they renew, that’s what will happen.
Companies that want to achieve hypergrowth, prosper in private equity partnerships, and launch initial public offerings should look at net dollar retention as a crucial indicator (IPOs). The average NDR of firms that have successfully gone public is just under 107 percent, according to Crunchbase. A score of more than 120 percent is regarded as exceptional. Alteryx and Okta, for example, had NDRs of 134 percent and 123 percent, respectively, at the time of their IPOs.
Learn how to Maximise Net Revenue Retention!
Gross Dollar Retention
Gross Dollar Retention (GDR) is a metric for calculating annual revenue lost from a customer base, excluding any gains from expansion revenue (cross-sells, upsells), or price hikes. Gross Dollar Retention is a metric that measures how well you keep your current customers.
The GDR percentage might be anywhere between 0% and 100%. The more your business processes are streamlined, and the closer your ratio goes to 100 percent, the greater your chances of maintaining a healthy company growth rate are.
Take note of the following:
GDR will never be more than a quarter of a percent.
The GDR for each individual client in the current month shall not surpass the MRR for that customer a year ago.
The lower your GDR, the less likely you are to succeed in getting investors interested in your company. This is because a low proportion suggests that your firm isn’t sustainable in the long run, while a large amount of churn indicates that you have core issues that need to be addressed.
Additional Resource- Customer Retention Guide
Takeaways
You must keep meticulous records of your company’s bookings. All downgrades and cancellations should be kept track of. It will aid in the organization of your company, and you will be held accountable to your investors.
Increased customer retention will benefit you in the marketplace.
NDR must be measured on a regular basis, such as monthly, quarterly, and yearly.
You can create different cohorts to see how different portions of the population react to your business.
VCs enjoy a growing front-end and back-end if you’re searching for funding.
That’s all for now; go get your money!
