Net Dollar Retention (NDR), also known as Net Revenue Retention (NRR), is a key metric used by SaaS companies to measure the overall growth of their existing customer base, taking into account both churn and expansion/upsells. It represents the percentage of revenue retained from existing customers over a specific period, after accounting for any lost revenue from churned customers and any additional revenue generated from existing customers. In this article we keep it simple and use NDR as term for NRR.
To calculate NDR, SaaS companies compare the revenue from existing customers at the end of a specific period to the revenue from those same customers at the beginning of that period. Any lost revenue from churned customers is subtracted from the starting revenue, and any additional revenue from expanded accounts is added to the starting revenue. The resulting percentage represents the net dollar retention rate for that period.
A high NDR indicates that a SaaS company is successfully retaining and expanding its customer base, while a low NDR suggests that the company may need to focus on improving customer retention and expansion strategies.
How to Calculate NDR/NRR
To calculate the Net Dollar Retention (NDR) rate for a specific period, follow these steps:
- Determine the starting revenue: Add up the total revenue generated from all customers at the beginning of the period.
- Account for lost revenue from churned customers: Subtract the total revenue lost from customers who churned during the period from the starting revenue.
- Account for revenue generated from existing customers: Add the total revenue generated from existing customers who expanded their subscription during the period to the starting revenue.
- Determine the ending revenue: Add up the total revenue generated from all customers at the end of the period.
- Calculate the NDR rate: Divide the ending revenue by the adjusted starting revenue (after accounting for lost revenue and expanded revenue) and multiply by 100 to get the percentage.
For example:
If a SaaS company had starting revenue of $1,000,000. The business has lost revenue of $50,000 from churned customers, and generated $100,000 in revenue from expanded accounts during a specific period (e.g. feature upsells or user expansion – more information here: Revenue Expansion). This means that the revenue of that customer base is $1,050,000 at the end of the period.
Hence, the ending revenue was $1,050,000 and the NDR rate would be (1,050,000 / 1,050,000) = 105%.
What is a good NDR?
The goal for a good NDR or NRR varies depending on the type of SaaS business and its target market.
For small to medium-sized businesses (SMBs), a good NDR rate generally falls between 90% and 110%. This means that the business is retaining and expanding its customer base, with little to no revenue lost due to churn. Achieving a high NDR rate is especially important for SMBs, as they typically have limited resources for customer acquisition and rely heavily on recurring revenue from existing customers.
For enterprise-level SaaS businesses, a good NDR rate may be higher, around 110% to 130%, or even higher in some cases. This is because enterprise-level customers typically generate a larger amount of revenue than SMBs, and therefore, a higher NDR rate is necessary to maintain revenue growth and profitability.
In general, the goal for a good NDR rate is to achieve a balance between customer retention and revenue expansion, without losing too much revenue due to churn. A high NDR rate indicates that the business is successfully retaining and expanding its customer base, while a low NDR rate suggests that the business needs to focus on improving customer retention and expansion strategies.