Net Dollar Retention (NDR) is one of the most critical sales metrics SaaS businesses rely on to measure their business performance. It tells you what should be optimized and changed to retain customers in the long term and drive your business growth.
In this article, let’s take a deeper look at what NDR is, why it’s important, how to calculate it, and what you should do to improve this metric.
What is Net Dollar Retention (NDR)?
Net Dollar Retention is a performance metric closely tied to customer retention. It takes into account revenue from existing customers at the start, upgrades, downgrades, and churn rates. If you’re running a subscription business or a SaaS company, you can’t ignore this metric.
How to Calculate Net Dollar Retention?
Here’s the standard Net Dollar Retention formula:
Net Dollar Retention = (Starting revenue + upgrades – downgrades – churn) / Starting revenue
Importance of Net Dollar Retention
Net Dollar Retention tells you if you’re doing a good job of satisfying customers and retaining them.
For example, if you constantly have this metric above 100%, it means your customers become more valuable as time goes on.
But if NDR is below 100%, you’ve had more churn and downgrades than upgrades, which can be due to unintuitive user experience, complicated onboarding processes, and bad customer support. Customers might feel frustrated with these issues, and they no longer want to stay with your product. In this case, you should sit down with your customer support team to find out what has happened and what actions you need to take to reverse the trend.
Net Dollar Retention vs. Gross Dollar Retention
Gross Dollar Retention (GDR) shows you how much of your customer revenue has remained with you a year later. Unlike NDR, it doesn’t take upgrades into account.
Here’s the Gross Dollar Retention formula:
Gross Dollar Retention = (Starting revenue – downgrades – churn rates) / Starting revenue
Net Dollar Retention vs. Net Revenue Retention
According to venture capitalist Seth Levine, Net Dollar Retention and Net Revenue Retention (NRR) are different.
- “NDR measures the average percentage change in revenue over the first 12 months of an existing customer.”
- “NRR measures the percentage of revenue retained from all customers (regardless of time as a customer) over a rolling moving 12-month window.”
How to Increase NDR
1. Keep Track of Existing Customers’ Engagement
Customer behaviors and expectations can be changed over time, so it’s crucial to track their engagement and satisfaction with your product or service. In doing so, you can tailor your sales messaging to their needs and predict their future buying intentions more accurately.
An easy way to do that is using a revenue intelligence platform like Revenue Grid to centralize all data from all channels into one place and create a 360-degree view of each customer.
Revenue Grid consolidates data gathered from Salesforce, email clients, and calendars of all who are involved in SaaS sales processes. All information is 100% in real-time, allowing you to understand exactly where a customer is on their buying journey, who high-value customers are, when was the last touch with a prospect, how likely an opportunity is at risk, etc.
You can also access meeting transcriptions, notes, and other documents to identify the gaps in product fit, onboarding experiences, and customer support. With Revenue Grid, you’re provided with automated signals that notify you of critical occurrences so you don’t miss anything and always stay on top of the game.
2. Align Product, Sales, Marketing, and Customer Support Teams
A mismatch in messaging between product, sales, marketing, and customer support can be a reason for high churn and downgrades.
Think about situations where a customer sees a high promise from your weekly newsletter, but after talking with a support agent, they find that the feature isn’t as good as described in the email. This will negatively affect customer experience and reduce their trust in your business.
That’s why you should ensure your product, sales, marketing, and customer support teams are always on the same page. Revenue Grid’s revenue intelligence platform brings all the data into a unified place, making it easy for your teams to access the data and update it anytime, anywhere. No more data silos, no more inaccurate information.
3. Build an Excellent Customer Service Experience
According to Kellogg, executive-in-residence (EIR) at Balderton Capital, “customer success is widely viewed as owning all or part of NDR.” The reason for this is quite simple: High retention couldn’t happen without successful onboarding experiences and excellent customer service.
When a customer submits a ticket, they expect to get immediate support. They want to hear from your team and receive the right solution to their problem as soon as possible. When they feel happy about your product experience, they’ll want to stick with you longer.
To create excellent customer service, the key is to be proactive. For example, identify common problems many existing customers have experienced through their support tickets. Then, create automated email sequences like FAQs and bring them into your onboarding process.
Start Measuring Net Dollar Retention
Net Dollar Retention is a useful sales metric that lets you know how your revenue is affected by expansion (upgrades/downgrades) and churn. It allows you to see if there is any problem you should address. So do not hesitate to start measuring it today.