If I mentioned new growth opportunities, what springs to mind?
Entering a new market? Expanding your user base?
Well, those are both potential profit drivers. But you could be overlooking one of the best opportunities to increase profit with minimal marketing spend.
I’m talking about net dollar retention. This isn’t just another “important metric” to keep tabs on—it’s a key piece of the puzzle in sustainable SaaS growth, and it’s time it took the spotlight.
Now we’ve got a bit of background, let’s get down to the nuts and bolts.
What is net dollar retention?
Sometimes called net revenue retention (NRR), net dollar retention rate is represented as a percentage. It measures how your existing customer base impacts your annual recurring revenue (ARR) or monthly recurring revenue (MRR).
Net dollar retention factors in churn rate, downgrades, and expansion revenue. The long and short of it is: NDR shows how good your SaaS business is at engaging customers, keeping hold of them, and encouraging them to increase their spend with you through cross-selling, upselling, and add-ons.
If that’s already got your brain ticking about links to other vital SaaS metrics like customer satisfaction, customer loyalty, and gross retention rates, you’re on the right track. Net dollar retention is a key indicator of business health. It impacts all areas of business, and deserves your attention.
Why is net dollar retention important?
Ultimately, net dollar retention measures customer retention.
It’s a telltale sign of the overall customer experience—it shows how well you engage, satisfy, delight, and deliver value. And as we know—users who stick around longer are more likely to contribute to expansion revenue and have a higher customer lifetime value (LTV), driving revenue growth and increasing profit well into the future.
Because of its association with customer retention, net dollar retention gives clues as to product stickiness too. A sticky product is used more often and creates loyal customers who are more likely to refer you more business. That’s good news for your bottom line.
Net dollar retention is also a vital consideration for investors. It’s a critical metric for business valuation because it indicates long-term viability. A solid NDR rate makes your SaaS business more attractive to stakeholders, acquirers, and venture capitalists. It suggests potential for success when looked at alongside other important metrics like average revenue per use (ARPU), annual contract value (ACV), and annual recurring revenue (ARR)—to name a few.
How to calculate net dollar retention rate
To calculate NDR, we use a simple formula.
(Starting annual recurring revenue (ARR) + Expansion ARR – Contraction ARR – Churn ARR), divided by your starting ARR. Multiply that by 100 and you’ve got your NDR as a percentage.
To make that a bit more relatable, let’s look at it in practical terms.
You begin the year with $1,000,000 in ARR. Nice!
You do a great job over the next 12 months keeping your customers happy and fulfilling your end of the deal: delivering promised value. In turn, many of your customers’ businesses scale and they upgrade their subscriptions to a total value of $200,000 additional ARR.
Sadly (and inevitably), some customers also downgrade their plans, amounting to a reduction of $40,000. Then there are the customers who churned, i.e. ended their subscriptions entirely. Their value was $18,000.
So, using the net dollar retention formula, we can equate that as:
($1,000,000 + $200,000 – $40,000 – $18,000) / $1,00,000 x 100 = 125.8% net dollar retention.
That’s an impressive (albeit fictional) number. It means your business generated an extra 25.8% recurring revenue from existing customers alone—not even taking into account new subscriptions.
What is a good net dollar retention rate in SaaS?
Ideally, your NDR should be over 100%. That means you could literally pull every penny from your marketing spend and stop all customer acquisition activities—and still grow. That’s a pretty neat position to be in, if you ask me.
If your net revenue retention rate is less than 100%, this is worrying. It means you’re losing existing customers. It’s dangerous territory to be in because a positive monthly recurring revenue (MRR) or ARR can easily mask the issue. When the revenue from new customers outweighs the revenue contraction from current customers, you can overlook the fact you’re actually leaking cash—not just jeopardizing business growth but putting your very survival into question.
If you want to talk baselines, the industry average sits at 109%. This is based on a review of 40 SaaS businesses that provided data in preparation for an IPO. As a general benchmark, a good NDR should be over 100%. Anything less is unacceptable and, frankly, alarming—especially for enterprise-sized businesses (small and medium-sized businesses can get away with a few percentage points lower). Over 120% and you’re golden!
So, now you know what this essential metric is (and how to calculate yours), what can you do to improve NDR?
Net revenue retention strategies
Having a lower NDR than you’d like isn’t the end of the world. There are a few simple steps you can take (let’s call them best practices or NDR measures) that can improve net dollar retention and significantly impact your profit.
Focus on expansion revenue (leverage your existing customer base)
Because NDR is all about your existing customer base, the cherry on the cake is that growing your ARR this way won’t be as pricey when it comes to customer acquisition costs (CAC).
Here are a few ideas to get you started:
- Analyze customer data to identify upsell opportunities
- Use in-app messages to target customers with higher usage
- Take proactive steps like developing and promoting add-ons or higher tiers
- Introduce a customer success team to encourage customers’ growth
- Review your pricing strategy (you should be doing this every 3 to 6 months anyway)
But what about the customers that are adamant about leaving? The reality is that some users will want to go—and some will churn involuntarily. Luckily, there are simple ways to reduce churn that you can get on top of right now.
Reduce churn (keep ahold of your existing customers)
Revenue churn is unavoidable: you won’t always sign up best-fit customers, and even if you do… they may not recognise the value of your SaaS product.
Customer retention rates are intrinsically linked to net dollar retention, so it’s an issue you’ve got to face. These are a few tactics you can use in the battle against customer churn:
- Provide excellent customer service and increase your NPS score (net promoter score)
- Offer cross-sells (even down-sells) when a customer is thinking of leaving
Educate them about features and functionality to demonstrate lasting value
At the end of the day, it doesn’t matter how many customers you sign up if your current ones are jumping ship. Sooner or later, you’ll exhaust the pool of potential users and subscriptions will dry up.
Implement subscription management software
To make any meaningful changes, you need data-driven insights. Introducing subscription management software doesn’t just come with a host of other benefits (like automated billing that saves time and energy, a single source of truth (SSOT), virtually elimiated human error, and better UX). It delivers intelligence—graular info on customer segments likely to churn or contribute to expansion revevnue that you can hand to your customer success, marketing, and sales teams—and proves valuable CRM data points you can leverage to increase NDR.
Can subscription management software increase net dollar retention?
In short, the answer is a resounding yes.
SaaS subscription management software can improve dollar retention by:
- Providing catalogue flexibilty that enables and automtes the cross-sell, upsell, or add-on process (through self service pages and customer portals)
- Reducing human error in billing, improving customer experience and bolstering brand reputation
- Automating and enhancing dunning management and communications, retrying payments to reduce involuntary customer churn
- Providing A/B testing capabilities so you can experiment with pricing strategies and models to strike the perfect value/cost balance
It’s clear that net dollar retention is not a SaaS metric to underestimate. If you’re interested in finding out how Stax Bill can help your businesses reduce churn, maximize profit, and optimize revenue operations, get in touch today!