NDR Explained: How To compute Net Dollar Retention

Acquiring recent customers is expensive. That’s why many companies financial institution their continued achievement on engaging existing customers. This means reducing churn and finding recent profits streams from your existing customer base. After all, these shoppers have already decided your business is worth their money. It may be more expense-efficient to keep them engaged than to try to convert brand-recent prospects.

You can assess the achievement of existing customer engagement through a budgetary metric called net dollar retention. This metric, which considers retention, profits expansion, and churn, reveals a lot about your corporation’s budgetary health. Here’s how it works.

What is net dollar retention?

Net dollar retention (NDR), also known as net profits retention (NRR), is a metric revealing how much money a corporation earns from its existing customer base. NDR takes into account both customer churn and profits 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 profits generated from recent customers acquired during the reporting period.

As a key act indicator (KPI), a business’s net dollar retention rate is a excellent window into its customer retention efforts. Businesses with a high net retention rate can count on their faithful customers for more of their overall profits. Businesses not earning much from existing customers must direct their resources toward customer purchase, which can be a pricey endeavor. 

This equilibrium is particularly significant for SaaS companies, or companies that provide software as a service. A SaaS corporation counts on monthly recurring profits from paid subscribers. If the customer achievement throng can convince their current customers the software is worth the subscription worth, they can maintain profits flow. This will assist them meet their net dollar retention benchmarks. If they can’t extract enough profits from the existing customer base, their sales throng will have to discover recent customers.

Net dollar retention vs. gross dollar retention

Net dollar retention and gross dollar retention (GDR)—also called gross profits retention—both consider how much recurring profits 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 profits retained from existing customers while deducting losses from churn and downgrades. Beyond this, it includes expansion profits earned from activities like upselling and cross-selling. As such, NDR shows the overall profits 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 profits from upsells, cross-sells, etc. Instead, it focuses purely on how much recurring profits remains after budgetary reporting for churn and downgrades. GDR is always less than or equal to 100%.

To picture this in a real-globe scenario, imagine your SaaS business:

• Starts with $100,000 in recurring profits
• Loses $10,000 due to churn
• Gains $20,000 from upsells

You compute net dollar retention to be 110% (net profits growth), but your GDR from the same period would be 90% (profits 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 profits from those customers.

How to compute net dollar retention

Multiple elements factor into an NDR calculation. First, you require to determine your total monthly recurring profits (MRR), and that includes four elements:

• Beginning profits. Recurring profits from existing customers at the commence of your measurement period.
• Expansion profits. Additional profits from upsells, cross-sells, or upgrades from the same customers.
• Contraction profits. profits lost due to downgrades by existing customers.
• Churned profits. Lost profits from customers who canceled or stopped using the service.

To compute 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 profits 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 profits: $100,000
• Expansion profits: $20,000 (upsells)
• Contraction profits: $5,000 (downgrades)
• Churned profits: $10,000 (cancellations)

Plug these four numbers into the formula: $100,000 + $20,000 – $5,000 – $10,000. This will arrive out to $105,000.

Next, divide that number by $100,000 (the beginning profits) and multiply your respond by 100. This produces an NDR of 105%.

Tips for improving NDR

• Prioritize customer retention strategies
• Look for upsell and cross-sell opportunities
• Analyze profits trends

NDR reflects customer satisfaction, retention, and growth within an existing customer base. Potential investors will regard your NDR as a window into your budgetary health, which means it’s significant 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 revenue strategy, such as SaaS businesses and subscription box services, can use customer connection management (CRM) software to identify customers at hazard of leaving. For instance, you might watch for an boost in customer back tickets or decreased product usage. You can then intervene before a customer leaves.

As a customer achievement manager, you can demonstrate lasting worth through consistent product updates and exceptional customer service. You might also inspire retention by offering a discounted rate for customers who initiate the cancellation procedure. You could also send a special gift or communication on customers’ birthdays, and propose a loyalty program. 

Look for upsell and cross-sell opportunities 

To develop profits from existing customers, focus on upselling extra charge features or cross-selling complementary products. This allows you to pursue additional profits streams while enhancing customer lifetime worth. Flagging and pursuing cross-sell and upsell opportunities, gives you more options for growing profits.

Analyze profits trends 

Study your profits 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 extra charge features. You can also try segmenting your customer base to identify which key segments are driving more profits. 

By tailoring strategies to specific segments, you debt customers who now high-growth opportunities to rapidly enhance NDR numbers.