Net Dollar Retention: The Key to Sustainable SaaS Growth

Customers are the lifeblood of your startup — and the revenue that you’re earning from existing customers is essential to growing your startup. That’s why Net Dollar Retention (NDR) is so crucial.

If you’re looking for expert help calculating your NDR, consider working with Graphite Financial. We offer a full suite of financial services, tailored specifically for startups. Read on to learn more about NDR and its importance:

What is Net Dollar Retention?

Net Dollar Retention, or NDR, is a metric that measures the percentage of revenue your startup retains from its existing customer base. NDR is used to gauge how well your startup retains and grows its revenue from its clientele over a specific period of time.

NDR accounts for revenue increases from upgrades, cross-sells and other expansion activities. It also considers metrics that could negatively impact it, such as customer churn.

It’s important to note that metrics like NDR and Gross Dollar Retention (GDR), while seemingly similar, are different. GDR measures the percentage of recurring revenue retained from existing customers over a designated period, while NDR also accounts for revenue gains from upgrades and expansion.

Why Net Dollar Retention Matters for SaaS Startups

NDR is important for determining whether your SaaS business can grow sustainably. A good NDR often reflects your product or service gaining market share and satisfying its customer base. It often indicates expansion and sustainable revenue growth opportunities and can help startup leadership forecast future revenue and growth potential.

Unlike metrics focused solely on customer acquisition, NDR provides insight into the health and value of your existing customer base. This makes it especially useful for long-term planning and demonstrating stability to potential investors.

Finally, NDR also significantly impacts your startup’s valuation and fundraising. Investors want to see metrics such as NDR as a means of gauging customer loyalty, market fit, and growth potential.

The Net Dollar Retention Formula Explained

The NDR formula is as follows:

• NDR = (Beginning ARR + Expansion – Contraction – Churn) / Beginning ARR

ARR stands for “Annual Recurring Revenue.” By using this as a starting point, your startup then adds any revenue from upselling, cross-selling, price increases and more. It then factors in any contraction from downgrades or reduced usage and lost revenue from canceled subscriptions (churn).

This formula is also commonly referred to as net revenue retention, particularly in contexts outside of SaaS, though the terms are often used interchangeably.

The two most popular methods for calculating NDR are aggregate-based and cohort-based. Aggregate NDR considers all customers together and looks at the overall health of your startup and its recurring revenue. Cohort-based NDR digs deeper and only assesses the performance of a specific group over time.

Step-by-Step NDR Calculation Example

Suppose your startup has $150,000 in ARR, $25,000 in expansion revenue, but lost $10,000 to downgrades and another $3,500 due to churn. Here’s how the formula would look to calculate NDR.

• NDR = (150,000 + 25,000 – 10,000 – 3,5000) / 150,000

NDR would equal 1.07 or 107 percent.

NDR is a crucial component of financial forecasting for startups.

Common Net Dollar Retention Calculation Mistakes

The biggest financial mistake that most SaaS companies make is using inaccurate or inconsistent data when making their calculations. Another mistake they make is including the revenue of any new customers, rather than existing revenue.

Many startups also fail to assess the various customer dynamics appropriately. Keep in mind that not all customers contribute equally to growth or contraction. That’s where cohort-based NDR can come in handy, as it allows you to see where the real impact is coming from and where there’s relative stability. Averages often don’t tell the entire NDR story— especially when it comes to identifying revenue lost due to downgrades or churn.

Net Dollar Retention Industry Benchmarks

For an SaaS startup, a good NDR is usually considered anything at or about 100 percent. This tends to be indicative of strong sustainable growth and customer satisfaction. It also means that your startup is retaining its customers and increasing revenue earned through either upselling or cross-selling.

How NDR Benchmarks Vary by Company Size

While an NDR of 100 percent or more is ideal for early-stage startups, there are different standards as your startup evolves. For instance, growth-stage startups should shoot for an NDR of at least 115 percent. M whereas mature startups that earn even more revenue should strive for an NDR of 125 percent or higher.

Furthermore, while these are all general guidelines for NDR based on your startup, it’s also important to consider similar startups and their NDRs.

Strategies to Improve Net Dollar Retention

Looking to improve your NDR? From presenting cross-selling opportunities to consumers to enacting strategies to prevent churn, there are many things you can do. A fractional CFO can help. Read on to learn more:

Product-Led Approaches to Boost NDR

A good product strategy sets a roadmap for building and evolving your startup’s product or service into something that adequately meets their needs as well as market demands. When you achieve this, the result is higher customer retention rates and more successful expansion efforts.

Ideally, you want your product or service to be “sticky.” That is, you want customers to come back to it time and time again due to its high value to them. In this sense, improving your NDR should involve a product-based approach to ensure that you’re continuously improving and able to provide an exceptional product.

Customer Success Strategies for NDR Optimization

A good customer success program proactively helps customers achieve their desired outcome with your product or service. Some ways to encourage engagement, retention and value delivery via customer success strategies include:

• Offer personalized onboarding to tailor guidance and support on how to utilize and understand the product.
• Offer continuous support and education so there are always resources available.
• Focus on your customers’ success to earn their trust and build loyalty.
• Identify at-risk accounts or at-risk groups and spend extra time and effort addressing concerns or issues to reduce churn.

By focusing on proactive engagement and support, startups can increase both NDR and customer lifetime value, ensuring that each customer contributes more revenue over time.

Financial and Pricing Strategies to Enhance NDR

Loyalty programs, tiered pricing, flexible contracts and incentives are all ideal ways to enhance NDR as part of your financial modeling.

Tiered pricing on subscription models helps offer more features at higher levels and can also encourage upgrading as customer needs grow. Offering loyalty programs for long-term customers or incentivizing longer-term contracts with reduced prices are also ways to enhance NDR. For instance, your service may charge $15 per month for customers who pay month-to-month or $144 if they pay for the whole year, the latter of which offers a $36 discount compared to always paying month-to-month.

Implementing a Net Dollar Retention Tracking System

Setting up a robust NDR measurement process all starts with identifying the scope and gathering the necessary data. The information that you’ll need to calculate net dollar retention includes:

• Monthly recurring revenue or Annual recurring revenue
• Expansion revenue
• Contraction revenue
• Churn revenue

Various tools also allow you to automate NDR calculations to set your own frequency for how often NDR is calculated and also permit gaining deeper insights.

Cross-Functional Accountability for NDR

Set NDR responsibility by defining a clear organizational structure and establishing roles. This may involve creating a cross-functional team and then outlining specific responsibilities for each department involved. Other tips for establishing cross-functional accountability include:

• Defining NDR policies and procedures
• Providing training and awareness
• Implementing a monitoring and alert system
• Regularly reviewing and updating your NDR information
• Working with a qualified fractional CFO

Net Dollar Retention and Startup Fundraising

NDR helps demonstrate a company’s ability to retain and grow revenue from existing customers, which investors carefully examine. Higher NDRs are more than just an indicator of customer loyalty; they also show good product-market fit and improved profitability prospects, which are ideal for startup founders and investors.

Higher NDRs also often lead to higher valuation for your startup — and that’s a good thing. Many investors are willing to pay more for startups that show the ability to retain and grow revenue from their existing customer base.

Elevate Your SaaS Growth with Strategic NDR Optimization

For more information on the importance of NDR, contact Graphite today. As a leading provider of accounting services for startups, our professionals will work hand-in-hand with you to help define and improve your NDR initiatives to put you in a position to grow and evolve. Contact us today for more information and to schedule a free consultation.

FAQs

What’s the difference between Net Dollar Retention and Gross Dollar Retention?

GDR measures the percentage of recurring revenue retained from existing customers over a designated period, while NDR also accounts for revenue gains from upgrades and expansion.

How often should startups calculate their Net Dollar Retention?

Startups should calculate their NDR at least monthly. Minimally, they should do it quarterly.

What is considered a good Net Dollar Retention rate for early-stage SaaS startups?

For an early-stage SaaS startup, a good NDR is usually considered anything at or about 100 percent. This tends to be indicative of strong growth and customer satisfaction. It also means that your startup is retaining its customers and increasing revenue earned through either upselling or cross-selling.

How do different pricing models affect Net Dollar Retention?

Different pricing models influence how much revenue your startup generates from its existing customers. For instance, use-based pricing can result in higher NDR, while more traditional subscription models may result in lower NDR.

Should Net Dollar Retention be calculated on MRR or ARR?

While NDR can be calculated using either MRR or ARR, the metric to use really depends on the startup. MRR tends to offer a more frequent and more detailed look into NDR, which can help facilitate faster adjustments. ARR tends to offer a more long-term perspective.

How do customer segments affect NDR analysis?

Customer segmentation impacts NDR by enabling more targeted strategies for retention and expansion. This can help provide more accurate insights into revenue growth and churn and allow startups to tailor their approaches to specific customer segments.

How does contract length impact Net Dollar Retention?

Longer contract lengths tend to result in higher NDR, while shorter contract lengths often result in lower NDR. Generally speaking, the longer the contract, the greater the customer engagement and opportunities for expansion.

What roles should own Net Dollar Retention in a SaaS startup?

NDR should be a shared responsibility between sales, marketing, startup leadership and customer success teams.