Net Dollar Retention
A SaaS measure to track the changes in your current client base over a specified time period is net dollar retention (NDR) or net revenue retention (NRR). Investors typically view the metric as a solid indicator of a healthy growth rate because it shows the changes in recurring revenue over time as a result of upgrades, downgrades, and churn.
Simply defined, NDR provides information on the amount of money that originates from current consumers that is lost over time or increases.
NDR fundamentally reframes customer success as a truly cross-functional project and a source of income. By concentrating on NDR, you are emphasizing customer happiness, adoption, and value realization across your entire organization.
NDR is founded on a straightforward idea. In the long run, more money will result from satisfied consumers because they are more likely to stick around, renew, use and adopt your products and services more frequently. On the other hand, dissatisfied customers are more likely to cut back on their spending or possibly leave altogether. All of this is summarized in your NDR, which demonstrates to your revenue team and potential investors just how strong your company is.
The number of clients that agree to use your product or service for a predetermined amount of time is what drives SaaS firms (typically one year or longer).
NDR is a crucial indicator for SaaS businesses since it assesses not only their ability to retain clients, but also their capacity to keep them engaged and provide innovations that aid in achieving or exceeding their business objectives.
SaaS companies interested in growth opportunities beyond sales alone should think about cross-selling, upselling, and providing new products and services to their existing client bases because creating new subscriptions is challenging and expensive. These actions increase the customer lifetime value while generating valuable and affordable growth revenue (LTV).
A percentage of your annual recurring revenue is called net dollar retention (ARR). This formula is used to determine NDR:
Net Dollar Retention (NDR) = (Beginning ARR - Churn + Expansion) / (Beginning ARR)
A rate of at least 100% would be a desirable benchmark because net dollar retention measures the portion of your business that you were able to keep and grow over a given period of time. Your current total ARR is more than or equal to your starting ARR if your NDR is 100% or higher. It occurs if you have maintained your present clientele and implemented cross-sell and upsell actions to increase the monthly fees your clients must pay when they renew their subscriptions.
For businesses looking to experience hypergrowth, be successful when partnering with private equity firms, and conduct initial public offerings, net dollar retention is a crucial measure (IPOs). Crunchbase reports that the typical NDR of businesses that have successfully gone public is little around 107%. Anything above 120% is regarded as being good. Alteryx and Okta, for instance, had NDRs of 134% and 123%, respectively, at the time of their IPOs.
Unbeknownst to you, the cost of acquiring a new client (CAC) can be five times more than the price of keeping an existing one. Aside from that, there are many advantages to keeping clients, like raising your NDR, growing your customer lifetime value (LTV), building a strong customer base, and word-of-mouth advertising.
Methods of retention like:
- Smooth customer onboarding,
- Creating an amazing user experience,
- Diversifying your offerings,
- Optimizing product pricing
These solutions will not only help you increase customer retention and decrease churn, but they will also produce a fantastic NDR that will bring investors pounding on your door.