What does “net dollar retention” mean?
Net dollar retention describes the percentage rate at which a company’s annual recurring revenue (ARR) has grown or shrunk from one period to the next.
To determine how much money was made (or lost), NDR looks at how many new customers were added, how many old customers were lost, and how much money customers spent over a certain period.
If stakeholders want a real-time income picture, they can use monthly recurring revenue (MRR) to figure out NDR.
NDR tells businesses and investors two essential things:
- How much they’re growing without getting any new customers
- Customers’ happiness with the way they currently trade value with the business
- What kind of holes does the company that wants to fill the bucket have? How sticky are the things it makes?
- NDR answers these questions thoroughly, so you don’t have to guess as much.
Like words
- Net dollar retention is what NDR stands for.
- SaaS NDR is a way to measure how much money software companies keep from customers who use their SaaS services.
- NRR is “Net Revenue Retention,” another word for “net dollar retention.”
Why net dollar retention is important
- NDR is a broad measure of revenue that businesses with a recurring revenue model use to see how healthy their customer interactions and business model are.
- The NDR of a company makes the whole RevOps environment more transparent.
- Revenue operations are a subset of business operations, but NDR includes all their parts, such as sales, customer success and retention, price optimization, and managing customer churn.
- It is easy to see how well these functions work together and where they need to be improved by measuring NDR.
Investors use NDR to determine how well a company will do in the future.
Investors like B2B tech companies with high net retention and expansion rates because it means the companies will be able to grow their income more efficiently and sustainably, and they may be able to make more money. Net dollar retention is the best way to judge these kinds of businesses.
According to a study by SaaS Capital, a SaaS company’s value goes up by 12% every year for five years for every 1% rise in net revenue retention.
For example, on the day that Snowflake went public in 2020, the company had an NDR of 158%.
This means that the average customer spent 58% more on the service over time. In other words, Snowflake would have grown by 58% even if they stopped spending money to get new customers that day.
This shows buyers that Snowflake has a healthy, growing business worth putting money into.
Companies can keep customers from leaving if they understand the NDR.
The NDR rate and the loss rate of a company are closely linked.
If a company’s product or message isn’t good enough and customers don’t want to stay for an extended period of time, NDR shows that.
Net retention is the number of people a business keeps after losing some.
If your NDR rate is low, customers will likely either downgrade or stop their subscriptions altogether.
You can use your NDR to improve your product list and customers’ experiences if you know what it is and how it works with them.
Companies that track NDR know their customers and how to keep them.
Increasing income by adding new subscribers all the time is expensive and can’t be done for a long time.
If a SaaS company wants to grow beyond sales, it should think about cross-selling, upselling, and giving its present customers new products or services.
With NDR, it’s easy for sales and customer success teams to sell within the company, and existing customers get more services.
This raises a single customer’s lifetime value (CLV) and helps the company keep customers and make more money from new ones.
How to Do the Math Return of Net Dollars
NDR is shown as a percentage of the income from customers who stayed with the business for some time.
The following method is used to figure it out:
Net Dollar Retention (NDR) = (Starting Customer Revenue + Revenue Churn + Expansion) / (Starting Customer Revenue)
If a company had $200,000 in ARR from customers at the start of the period, lost $20,000 in revenue due to customers leaving, and got an extra $25,000 in revenue due to growth, its NDR would be: NDR = ($200,000 – $20,000 + $25,000) / ($200,000) = 107%
Benchmarks for Net Dollar Retention
If the NDR rate is 100%, there is no customer turnover, but the business is also not growing.
A thorough look at the S-1 forms of 40 SaaS companies showed a median NDR of 109%. Crunchbase says that the average NDR of businesses that do well at IPOs is about 107%. This is a starting point to compare a company’s performance to its SaaS business peers.
In most businesses, an NDR between 120% and 130% means that customers are happy and there is room for long-term growth.
Companies with an NDR at this level are keeping their current customers and upselling and getting new customers at a rate of 20% or more per year.
The number of customers that buy from a business is going down if its NDR goes below 100%.
This might be normal for a short time if the company is repositioning (focusing on a different group of users). Most of the time, though, it means that customers are unhappy, don’t stick around long, and aren’t loyal.
I am keeping current customers and making money.
Keeping customers and getting their money back is a meaningful measure of customer loyalty. If a business wants to grow in a way that doesn’t hurt the environment, its members must put their present customers first.
How Customers Affect Keeping Customers
The people who already do business with a company have the most influence on its NDR rate. Here are a few numbers that show how critical current customers are to keeping money coming in:
The costs of getting new users are five to seven times higher than keeping old ones.
Profits increase by 25% to 95% for every 5% rise in customer retention.
It works more than 60% of the time to sell to current customers but only 1% of the time to sell to new ones.
$138.6 billion is lost every year by businesses because customers leave when they don’t have to.
A business that doesn’t keep customers and make money first will lose money in the long run. In the best case, they won’t grow without customer loyalty. In the worst case, they break quickly.
Tips for Increasing the Rates of Revenue Retention
Improving the percentage of income from keeping current customers is essential for long-term business growth. Try these tips to make more money from your current customers: Provide excellent customer service. Microsoft’s Global State of Customer Service Report says that 96% of customers say good customer service is a big reason they stick with a brand. “Excellent customer service” means quick responses, helpful solutions to problems, self-service choices, and talking to customers in a unique way.
Set up ways for customers to give feedback. Use NPS polls to determine how satisfied (or not satisfied) people are with your product. Before they cancel their subscriptions, use comments to find customers likely to leave.
Offer reward schemes. Customers are often rewarded for being reliable, and these rewards pay off big time. Customers who are loyal to a brand spend more money and stay with that brand longer than customers who aren’t loyal. Think about giving loyal customers rewards or benefits, like discount sales or points they can use to buy things in the future.
Make services unique to meet the wants of customers. If you know what your customers want, you can make your products and services fit those needs and sell them other related goods or services. Customers are more likely to use your services if you make them more personalized.
Cross-sell and up-sell.Low customer retention rates can be fixed by giving customers special services that give them extra benefits. Getting people to sign up for extra services that work well together makes their experience better.
There are more ways to raise NDR.
To raise their NDR, businesses should use more than one method. Besides the ones listed above, the ones below are also good ways to keep users and make more money over time.
Use in-product tips to get people to buy your products.
People are much less likely to switch providers if they are really into their goods and know how to use them correctly.
That’s why many businesses spend money on engaging guides and other features built into their products, in addition to their customer onboarding programs.
This helps customers quickly get used to the product, which keeps them as customers longer and brings in more money.
For each client, make a product plan.
The most important thing for most SaaS businesses is, of course, their SaaS.
A microservices architecture is used to build most goods. This means that they have several parts that can be used separately or together to add more features.
Along with educational content built into the product itself, making product roadmaps for each customer ensures they’re using all of its features in the way that was meant for their business.
Use a pricing plan based on subscriptions.
People like subscription-based pricing plans because they give customers predictability and ease of use, which makes them more loyal.
Customers are safe knowing they won’t have to pay extra for services they don’t want for as long as they want them.
Automate bills for subscriptions
- When it comes to subscription payments, there are four main problems:
- Mistakes in routine processes can lead to overcharges, missed payments, or forgotten payments.
- Some people leave when you can’t accept more than one payment method.
- People might forget to stop or renew their subscriptions.
- Customers may move providers if they disagree with their bills.
- For up to 40% of churn in SaaS companies, the customer can’t make payments because of the abovementioned things.
- Most of these problems can be avoided entirely with automatic payment. Also, automation makes it easy to do the accounting work that comes next.
- Hire value-added retailers (VARs) as a partner.
- Most VARs provide extra services, like IT support, that improve the customer’s experience with your product and make them happier.
They not only give customers an extra layer of security, but they also let businesses reach new groups of customers without spending more on sales, which can help them keep more of their money over time.
Product webinars and classes should be held.
The better for the business, the more customers and potential customers are involved in its goals.
Hosting webinars and seminars is a great way to teach your customers not only how to use your goods and services but also how to make their business run more smoothly.
Make things run more smoothly inside.
When businesses can make, market, and sell goods with few resources, their bottom line increases.
In terms of sales, marketing, and the product itself, iterating quickly and cheaply means the company has more chances to make sales.
It also protects the company’s bottom line against losing customers, which is bound to happen.
Invest in your workers
When workers are happy and driven, they bring in more money for customers.
Ultimately, this means spending money on: training, competitive pay, benefits for workers, and an excellent workplace.
- Employee engagement and motivation have a direct positive effect on net revenue retention. This is because engaged workers can better deal with customer problems and questions.
- This makes people happier, which makes them less likely to leave.
- Make the methods for qualifying leads better.
Giving deals to everyone might get you a few short-term deals, but it won’t help you grow in the long run, which is what NDR is all about.
Sales-qualified leads, or SQLs, should be ideal customers for your business and have a clear need that your product can meet.
To ensure this, set criteria for sales teams to qualify leads before selling, like price limits and buying power.
