Acquiring new customers is expensive. That’s why many companies bank their continued success on engaging existing customers. This means reducing churn and finding new revenue streams from your existing customer base. After all, these shoppers have already decided your business is worth their money. It may be more cost-efficient to keep them engaged than to try to convert brand-new prospects.
You can measure the success of existing customer engagement through a financial metric called net dollar retention. This metric, which considers retention, revenue expansion, and churn, reveals a lot about your company’s financial health. Here’s how it works.
What is net dollar retention?
Net dollar retention (NDR), also known as net revenue retention (NRR), is a metric revealing how much money a company earns from its existing customer base. NDR takes into account both customer churn and revenue expansion from upsells, cross-sells, and upgrades within a reporting period. Companies making money from existing customers are likely to have a high NDR. Note that NDR does not include revenue generated from new customers acquired during the reporting period.
As a key performance indicator (KPI), a business’s net dollar retention rate is a good window into its customer retention efforts. Businesses with a high net retention rate can count on their loyal customers for more of their overall revenue. Businesses not earning much from existing customers must direct their resources toward customer acquisition, which can be a pricey endeavor.
This balance is particularly important for SaaS companies, or companies that provide software as a service. A SaaS company counts on monthly recurring revenue from paid subscribers. If the customer success team can convince their current customers the software is worth the subscription price, they can maintain revenue flow. This will help them meet their net dollar retention benchmarks. If they can’t extract enough revenue from the existing customer base, their sales team will have to find new customers.
Net dollar retention vs. gross dollar retention
Net dollar retention and gross dollar retention (GDR)—also called gross revenue retention—both consider how much recurring revenue a business can extract from its existing customer base. However, there’s a key difference between the two:
Net dollar retention (NDR)
NDR accounts for revenue retained from existing customers while deducting losses from churn and downgrades. Beyond this, it includes expansion revenue earned from activities like upselling and cross-selling. As such, NDR shows the overall revenue growth within the customer base. Ideally, your NDR will be more than 100%, showing growth.
Gross dollar retention (GDR)
Gross dollar retention does not include expansion revenue from upsells, cross-sells, etc. Instead, it focuses purely on how much recurring revenue remains after accounting for churn and downgrades. GDR is always less than or equal to 100%.
To picture this in a real-world scenario, imagine your SaaS business:
- Starts with $100,000 in recurring revenue
- Loses $10,000 due to churn
- Gains $20,000 from upsells
You calculate net dollar retention to be 110% (net revenue growth), but your GDR from the same period would be 90% (revenue retention excluding upsells). In essence, GDR tells you how well you’re retaining existing customers, while NDR tells you how well you’re both retaining and growing revenue from those customers.
How to calculate net dollar retention
Multiple elements factor into an NDR calculation. First, you need to determine your total monthly recurring revenue (MRR), and that includes four elements:
- Beginning revenue. Recurring revenue from existing customers at the start of your measurement period.
- Expansion revenue. Additional revenue from upsells, cross-sells, or upgrades from the same customers.
- Contraction revenue. Revenue lost due to downgrades by existing customers.
- Churned revenue. Lost revenue from customers who canceled or stopped using the service.
To calculate NDR, add all four of these elements together, keeping in mind that your contraction and churn numbers will be negative. Lastly, divide the sum by your beginning revenue and multiply the quotient by 100 to get a percent. You can do so using this formula:
NDR = [(Beginning revenue + expansion revenue – contraction revenue – churned revenue) / Beginning revenue] x 100
Example of an NDR calculation
Here’s an example of an NDR calculation with real numbers:
- Beginning revenue: $100,000
- Expansion revenue: $20,000 (upsells)
- Contraction revenue: $5,000 (downgrades)
- Churned revenue: $10,000 (cancellations)
Plug these four numbers into the formula: $100,000 + $20,000 – $5,000 – $10,000. This will come out to $105,000.
Next, divide that number by $100,000 (the beginning revenue) and multiply your answer by 100. This produces an NDR of 105%.
Tips for improving NDR
- Prioritize customer retention strategies
- Look for upsell and cross-sell opportunities
- Analyze revenue trends
NDR reflects customer satisfaction, retention, and growth within an existing customer base. Potential investors will regard your NDR as a window into your financial health, which means it’s important to hit your NDR benchmarks and demonstrate sustainable growth. Here are some tips for doing just that:
Prioritize customer retention strategies
Retaining customers is the cornerstone of a high NDR. Companies with a subscription-based business model, such as SaaS businesses and subscription box services, can use customer relationship management (CRM) software to identify customers at risk of leaving. For instance, you might watch for an increase in customer support tickets or decreased product usage. You can then intervene before a customer leaves.
As a customer success manager, you can demonstrate lasting value through consistent product updates and exceptional customer service. You might also encourage retention by offering a discounted rate for customers who initiate the cancellation process. You could also send a special gift or message on customers’ birthdays, and offer a loyalty program.
Look for upsell and cross-sell opportunities
To grow revenue from existing customers, focus on upselling premium features or cross-selling complementary products. This allows you to pursue additional revenue streams while enhancing customer lifetime value. Flagging and pursuing cross-sell and upsell opportunities, gives you more options for growing revenue.
Analyze revenue trends
Study your revenue trends from customer expansion (e.g., upgrades, enhanced subscriptions). What prompted customers to upgrade? Which products do customers typically purchase as add-ons? Note how many customers respond to tailored marketing messages, such as personalized emails encouraging sign up for premium features. You can also try segmenting your customer base to identify which key segments are driving more revenue.
By tailoring strategies to specific segments, you leverage customers who present high-growth opportunities to rapidly improve NDR numbers.
Net dollar retention FAQ
What is a good net dollar retention rate?
A good net dollar retention rate exceeds 100%. This indicates that your company is growing its revenue from existing customers through upsells, cross-sells, and expansions—even after accounting for downgrades and churn.
What does 100% net retention mean?
A 100% net retention rate means a company retains its existing revenue from current customers, with no net growth or loss from expansions, downgrades, or churn.
What is the formula for net dollar retention?
The formula for net dollar retention is: NDR = [(Beginning revenue + expansion revenue – contraction revenue – churned revenue) / Beginning revenue] x 100.
