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Dollar-Based Net Expansion Rate

Although different methods are used by different companies to determine net growth, the fundamental concept is the same: revenue from customers within a cohort during a prior base period or at a prior point is compared to revenue from current customers. You are analyzing only those customers who remained with the company throughout the entire period. New and churned customers have been excluded from the study. DBNER can help you assess the stickiness of your product and the potential for growth among your present audience.

Understanding Dollar-Based Net Expansion Rate

The dollar-based net expansion rate is especially important for software and technology businesses with subscription-based business models. These organizations are known as software-as-a-service (SaaS) businesses.

These businesses aim to attract new clients while progressively raising revenue from current ones. Customers may be persuaded to purchase more goods or services, or consumption of goods and services within client organizations may rise.

DBNER demonstrates how successfully a company has expanded its customer base over time by introducing new products and services. It is calculated over time using customers who have remained with the business during that time.

A DBNER above 100% indicates that throughout the measured time, the company was successful in selling extra goods or services to existing consumers.

How Do You Calculate DBNER?

In order to determine a company's dollar-based net expansion rate, revenue from customers must be compared to revenue from the same customers at the beginning and end of a period. It's important to note that the DBNER calculation excludes former clients of the company.

When Do You Use DBNER?

For SaaS-based technology enterprises, DBNER is especially helpful. To grow revenue, they can either raise sales to present customers or attract new ones. Many SaaS businesses strive to "land and grow," or acquire new clients while gradually increasing the services they give them.

SaaS businesses must extend sales to their current customer base because it is typically more cost-effective to raise sales to existing clients than to acquire new ones. If they are able to, it shows that clients are content with the service and are using the business's products more frequently.

DBNER is a helpful indicator for determining how much existing consumers improve their use of a company's goods and services over a specific time frame. The dollar-based net expansion rate of a corporation is not the same as the dollar-based net retention rate (DBNRR).

Advantages of Dollar-Based Net Expansion Rate?

  • The lifetime value of a customer's use of a company's goods and services rises with increased usage. Due to the subscription-based business model used by SaaS enterprises, a high DBNER should result in an increase in recurring revenue.
  • The portion of a company's revenue that it anticipates will continue in the future is referred to as recurring revenue. By granting continued access to their goods or services in exchange for recurring payments, businesses generate recurring income. One-time sales are less predictable and unstable than recurring revenues. Recurring revenues are ones that businesses can count on getting on a regular basis with a high degree of certainty.
  • SaaS businesses aim to increase the amount of goods or services they offer to clients in order to increase their recurring income. Many SaaS companies are valued at a high level because of recurring revenue and rapid rates of growth.
  • Recurring revenue multiples are widely used to determine the worth of SaaS companies. This is different from techniques used to assess conventional businesses, such as analyzing previous sales of similar businesses or arriving at a present value using the discounted cash flow (DCF) method.
  • Long-term contracts with satisfied customers reduce the volatility of earnings, raising valuations. Scalability benefits SaaS companies as well. As more people utilize cloud-based apps, these enterprises may capture a bigger portion of a growing market. SaaS companies usually offer proprietary technology and possess proprietary intellectual property, which increases their valuations.
  • However, when combined with other data, the dollar-based net expansion rate can offer important insights into a company's performance.
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