How To Calculate Net Dollar Retention for SaaS

In SaaS, Net Dollar Retention (NDR) is often the best operational churn metric as it includes expansion and contraction in revenue from current customers.

Here's everything you need to know about NDR, including how to calculate it and what it means for your SaaS business.

1. What is NDR (Net Dollar Retention)?

Net Dollar Retention (NDR) is the net impact of upgrades, downgrades and churn from your current customers on annual or monthly recurring revenue (ARR or MRR). It does not include the impact of new customers.

Here are some key highlights of Net Dollar Retention as a metric:

Net Dollar Retention (NDR) assesses revenue changes from existing customers.
High NDR reflects customer satisfaction and loyalty, impacting pricing strategies.
NDR provides insights into a SaaS business's financial health and recurring revenue trends.
Increasing NDR involves strategies like customer success programs and effective onboarding.

2. How to calculate Net Dollar Retention

The NDR formula takes into account all changes to existing customer's subscriptions but typically ignores new ones.

Here’s the NDR calculation formula:

NDR can also be calculated using this alternative formula:

Net Dollar Retention = (End-of-Period Recurring Revenue - New Business Revenue) / Start-of-Period Recurring Revenue

If the NDR value is greater than 100%, this indicates that your SaaS business is successfully generating more revenue from existing customers than it is losing through downgrades and churn.

This is a great indicator of a healthy, growing SaaS business.

3. Net Dollar Retention (3 Key Components)

1. Expansion Revenue

Expansion revenue includes additional revenue generated from existing customers through upsells, cross-sells, and add-ons. This revenue is typically a good indication of customer satisfaction.

2. Downgrade Revenue

When users reduce their subscription plans or scale back the amount they spend on your solution, it results in a decrease in MRR for your SaaS. These customers don't cancel, they just reduce the amount of money they spend with your solution.

3. Churned Revenue

When users cancel their subscriptions, churned revenue is the amount of recurring revenue lost.

If you are consistently losing a significant number of customers and are tracking low customer lifetime value, this can indicate that your retention strategies are proving ineffective.

A tool like Raaft can help SaaS teams craft effective cancellation flows that prevent churn.

4. Why Monitor Net Dollar Retention

Revenue Growth Forecasting

NDR is an essential tool for forecasting revenue growth. The SaaS metric helps founders understand the changes in MRR from their existing user base. By analyzing NDR trends over time, SaaS teams can make more accurate predictions about future revenue and cash flows.

User Satisfaction & Loyalty

A high NDR value indicates that your users are not only staying subscribed to your SaaS solution but are also increasing their spend through things like upsells. This is a strong sign of customer satisfaction and loyalty, as well as an opportunity for upselling and cross-selling.

Pricing Strategy Optimization

Tracking NDR enables you to identify trends in customer behavior related to your pricing strategy. If your NDR is consistently below 100%, it may be time to reevaluate your pricing model or product offerings. You should always aim to squeeze as much value out of your existing user base as possible before looking at user acquisition.

Why Does NDR Matter?

Tracking and optimizing customer retention is essential for any SaaS company.

Net dollar retention (NDR) is a key metric that provides valuable insights into the financial health of your recurring revenue business. Net dollar retention offers an interconnected view of customer behavior, encompassing upsells, cross-sells, downgrades, and churn.

When it comes to measuring the effectiveness of your customer retention strategies, NDR can play a pivotal role in measuring the growth of MRR (monthly recurring revenue) and helping SaaS founders identify trends.

For a SaaS founder, knowledge is power. Tracking NDR alongside a broad range of other SaaS metrics is critical to monitoring growth and performance.

5. Net Dollar Retention Formula (How Does It Work?)

NDR is a revenue-based metric that measures the growth or decline in recurring revenue from your existing SaaS users. This takes changes in their subscription plans and cancellations into account. Net dollar retention is expressed as a percentage. Let's look at how to calculate net dollar retention. Don't worry, with the formula template in your corner, it's pretty easy.

6. Increasing Net Dollar Retention (6 Best Strategies)

1. Develop Customer Success Programs

If you can implement a robust customer success program, this will support you in proactively addressing customer concerns and improving satisfaction - which inevitably leads to higher retention rates and increased upsell opportunities.

2. Optimize Pricing Strategy

SaaS founders should make a habit of regularly reviewing their pricing strategy to ensure it aligns with their customers' needs and expectations. You should consider offering discounts or incentives for longer-term contracts to encourage customer loyalty. For instance, you could offer a discount for those interested in subscribing to an annual subscription, instead of paying monthly.

3. Leverage Data & Analytics

You can utilize customer data and analytics to identify trends and patterns in customer behavior. This gives SaaS founders the necessary information they need to understand the factors driving user churn or downgrades. With customer data at your fingertips, you can make informed decisions about how to approach improving your net dollar retention rate.

4. Invest In SaaS Product Development

Continuously refining and improving your SaaS product is essential to meeting the changing demands of customers and ensuring satisfaction. You should aim to gather customer feedback and use it to inform your product development process. You can use a solution like Raaft to develop cancellation flows that collect insightful data on user experiences.

5. Implement Effective Onboarding Processes

A seamless and standardized SaaS onboarding experience can set the stage for a long-lasting customer relationship. With this in mind, you should invest in a comprehensive onboarding process that educates new users on how to immediately unlock value from your SaaS product.

6. Build A User-Centric Culture

To see major improvements in your net dollar retention rate, you need a company-wide focus on customer satisfaction and retention. This means aligning your team's goals and objectives with customer success, and regularly assessing and adjusting your processes to ensure everything you do is focused on driving customer satisfaction. This is the answer to many SaaS problems.