As a SaaS business owner, you have surely heard about “Customer Acquisition Cost,” “Customer Lifetime Value” or “Monthly Recurring Revenue” metrics and most likely are using those in your business. There’s one more important metric that often doesn’t get the spotlight it deserves though: Net Dollar Retention (NDR). NDR can tell you how satisfied your users are with your product or service just by checking whether they are spending more money on your service than earlier or less. And yet, this metric is very often neglected by business owners.
So, in this article, we’re going to break down what Net Dollar Retention is, why it’s so important, and how you can start using it to make your business better. So, let’s get started!
What is a Net Dollar Retention?
Net Dollar Retention (NDR), sometimes also called Net Revenue Retention (NRR), measures how much money your existing customers are spending on your service over time and whether your revenue has grown or shrunk in the last year.
In the simplest words, it shows how well a SaaS business can engage, retain, and encourage its users to spend money on the company - so you can use this metric both to calculate your revenue and to measure customer retention.
Why is NDR important for SaaS businesses?
SaaS businesses, in the vast majority, rely on subscriptions - meaning the number of customers who will keep using your product or service for a defined time (month, year, or longer). As every single business owner can admit though, bringing new customers and retaining the current ones isn’t such an easy task - especially when users have so many services and applications to pick from.
What’s more, most of the business revenue typically comes from existing customers - Smallbizgenius found that 65% of a company’s business comes from repeat customers. That makes determining how many of your users are satisfied with your service and what you could do to boost retention crucial.
Here’s where calculating NDR can come in handy.
A high NDR means your customers are happy with your product or service enough to spend more money on it - for example, by subscribing to a higher-tier plan. So, if your existing customers are happy and buying more, your business can grow without spending a large budget on customer acquisition.
Sounds unbelievable? Then look at this example:
Let’s say you have 10 customers paying $50 a month for a subscription. One of the customers churns - so you lose 10% of your customer base and revenue. Two of those customers though decided to upgrade their plan to a higher tier and are now paying $100 per month. That way, you’ve actually increased your revenue retention rate — even though you lost a customer.
Additional advantage: a good NDR can also attract investors because it shows your product is useful enough for your customers to keep using it long-term, making your brand more valuable altogether.
How can you calculate Net Dollar Retention?
Now it’s time for some math - how you can calculate your own NDR metric. For this, you will need four things:
- Starting Monthly Recurring Revenue (MRR) or Annual Recurring Revenue (ARR) metrics, depending on whether you want to calculate a monthly NDR or annual one.
- Upgrade MRR or ARR metrics (meaning how much money you generated from users who moved up to the higher tier, bought additional add-ons, or in any other way spent more money on your product or service)
- Downgrade MRR or ARR metrics (meaning how much money you lost because subscribers are now paying less than they used to, for example, because they recently subscribed to a lower tier plan than they had earlier)
- Churn rate
The NDR formula then looks like in the picture below:
Practical example
Since this might seem a bit complicated, here’s a practical example of calculating the NDR metric.
Let’s say you run an email verification service. At the start of the year, you had 100 customers who were spending $1000 in total. By the end of the year, they spend $1200. So, you’d divide 1200 by 1000, which gives you 1.2. Multiply that by 100, and you get an NDR of 120%. That means your existing customers increased their spending on your email verification service by 20% in the year.
What is a good Net Dollar Retention rate?
Is a 120% NDR rate a good one? Definitely - this means your existing customers are spending more money than they did before on your product or service because they found it valuable. Of course, you can have even higher NDR, as the brands from the image below show:
On the other hand, if your NDR is below 100%, that’s a warning sign as it means your current users are losing interest in your service - and are spending less. You might still see a positive MRR with an NDR below 100% if you bring enough new users to cover the ones that churned - but how long can you keep this going without hurting your budget?
10 tips on how to improve your Net Dollar Retention
If you found out your NDR is below 100%, then it’s high time to take action and work on your user engagement and retention strategy. Where should you start, though? You can first have a look at our 10 tips on how you can boost user retention - and this way, also your NDR metrics.
Analyze your data
The first thing you should look at is your analytical data, as it can give you a clue as to what makes your users lower their spending or abandon the application altogether. You should look closely at usage and spending patterns, customer satisfaction, and previous contact with your support team.
Plus, the data can also show you which users are on the verge of churn, and you should reach out to them (for example, to ask if there are any issues they might be having).
Gather customer feedback
Another place where you can learn more about why your users started to spend less on your product or service is user feedback. You can gather those by sending surveys, reading reviews or social media comments, or even reaching out to your customers directly. This will help you discover what features they find most useful, what they are missing, and what makes them frustrated with your service.
Improve user experience
The data you gathered earlier should also highlight whether there are any issues users might be having while they are using your product or service and causing them to churn. The easier it is for them to achieve what they want, the more likely they will continue using your service. If they are struggling with the app or service though (for example, because the interface is confusing or buggy), they might start looking elsewhere.
Show them the value of your product
The key to turning users into customers and keeping them with you for longer is to make them see how useful your product or service is for them. For this, creating a user-friendly onboarding process and sharing detailed guides and tutorials for them will be handy. The faster your customers can understand how to get the most out of your service, the more likely they will keep using it - and maybe even decide to spend more on it.
Add new features
To keep customers happy and engaged, you should also regularly add value to your product or service by adding new features and functionalities. Doing this shows that you are committed to improving the product, which can make your existing customers feel like they are getting more value for their money.
Which features your customers might like the most? The customer feedback you gathered earlier should be very useful here - if many users mention that the product or service is lacking a specific feature or functionality, that’s exactly the one you should focus on.
Have a customer support
Quick, effective responses to questions or problems can prevent customers from becoming frustrated with you and leaving for a competitor. So when a customer reports an issue, resolve it as fast as you can and make sure that the user has no more problems. That way, you can turn a potentially negative experience into a superb one, thereby improving your retention rates - and NDR as well.
Create a loyalty reward program
To entice customers to stick around, you might also want to use incentives in the form of customer loyalty and rewards programs. For example, did you know that 64% of loyalty program members spend more money to maximize how many points they can earn? McKinsey even found that just signing up for loyalty can convince 62% of consumers to spend more money on a brand!
So implementing a loyalty program that gives long-term customers unique benefits like discounts or free upgrades is worth trying out. These perks can make your most loyal customers feel valued and less likely to switch to a competitor.
Have an upsell and cross-sell strategy (but be careful here!)
SuperOffice found that, on average, 70-95% of business revenue comes from upsells and renewals. After all, it’s far more likely that you will convince your current customers to buy add-ons, get a discounted subscription to your other product or service or move to a higher product tier. There is a fine line between offering something valuable and being pushy though - and crossing the line might anger or scare the customer away.
So you need to be very careful about who, when, and how often they will get the upselling or cross-selling offers - the more personalized the offer, the higher the chance the users will convert.
Of course, you can use all those tactics in your company if you have NDR above 100% too - it may help you to rise to Zoom or Slack NDR levels. And if you need more guidance on how exactly you can boost your Net Dollar Revenue, at Valueships we are always happy to lend a helping hand.
Conclusion
Net Dollar Retention, or NDR, is a metric that can tell you a lot about how your SaaS business is doing. A high NDR shows that your customers are happy, trust your business, and as such, they are willing to spend more. Anything below 100% meanwhile means some issues are discouraging users from using your product or service.
Improving the situation isn’t anything hard though - you just need to understand what your users really want from your service and how you can give them it. By boosting retention, you’ll not only make your current customers happier but also set your business up for long-term success.
