Net Dollar Retention: Definition + Formula

Think of the competitive SaaS industry as a garden. First, you need to plant the seeds (acquire the customers) and nurture them ( through onboarding and marketing tactics) in the hopes they turn into strong plants (loyal customers).

Then, to maintain a thriving ecosystem (retention of existing customers) that yields bounty, you need to keep an eye on your plants (gain insight using important metrics) and ensure daily care (stellar support and constant updates to reduce churn).

Only a well-managed SaaS business will lead to steady, long-term recurring revenue.

To keep this metaphor simple: Your shovel to a thriving SaaS garden is Net Dollar Retention (NDR), an essential metric that focuses on efficient growth.

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So, let’s dig in.

What Is Net Dollar Retention?

Regarded as a highly important metric, Net Dollar Retention (NDR) offers insights into how a company’s ARR (annual recurring revenue) has changed within a particular period.

To gain a more time-specific revenue perspective, SaaS businesses can also use the MRR (monthly recurring revenue) instead of its ARR.

Because it is a key performance metric, net dollar retention looks at how successful a SaaS company is at winning, keeping, and upgrading users. So, the higher the net revenue retention is, the better.

Net Dollar Retention Benchmark

It is generally considered a good NDR if it goes over 100%, as this would imply that there is an increase in revenue from your current customers.
In other words, your SaaS business can continue its expansion without having to gain any new subscribers.

Just look at these rapidly scaling SaaS businesses:

Snowflake: 151%
DataDog: 130%
Confluent: 130%
SentinelOne: 128%

Therefore, anything under 100% is regarded as a low NDR rate, also known as a leaky bucket. This means that your business is heavily spending on gaining users but letting them slip away afterward.

According to 2023 market data, the approximate median is 115%.
Now, to answer the previous question, Company X, with an NDR of 113%, while it’s on the right track, needs to double down on customer retention efforts.

Why Does NDR Matter To SaaS?

Businesses with a high NDR grow fast. It’s that simple.
Keeping track of this rate means monitoring customer retention and engagement, which are two of the most lucrative areas within the SaaS business model.

Net Dollar Retention is one of the most important metrics because it tells you:

How much your SaaS can grow without acquiring new revenue streams
How sticky your product is
Also, here are three more reasons why you need to shortlist this KPI.

Why NDR Matters

1. It’s a Simple and Straightforward Metric

Net dollar retention is widely favored because of its power to easily harness and deliver essential data-driven insights.

However, this performance KPI gives you a quick snapshot of how healthy your SaaS business is.

For a more detailed understanding and depending on your NDR findings, you might still want to track other relevant metrics like customer lifetime value (LTV) or your churn rate. A quick look into CRM data could be useful, as well.

2. It’s the VC or Aquirer’s Favorite Pick

Every potential investor or acquirer perceives NDR as a cornerstone metric. Why? Because it provides the big picture of a company’s allure.

An investor typically isn’t satisfied with seeing only the current total revenue. They usually are more interested in a business’s growth opportunities.

Can it retain customers? Is the customer experience with the product satisfying enough to generate additional revenue?

Fortunately, the NDR rate answers these key questions.

3. It’s Great for Detecting Churn Early On

The SaaS industry is as alluring as it is challenging. So much so that you might think you are winning even when you are unknowingly losing.

This is what happens when SaaS companies have a higher revenue generated from newly acquired customers than the lost revenue from their existing customer base.

NDR helps you identify these holes, which would otherwise go unnoticed and continue eating into your profit.