Net Dollar Retention (NDR)

Net Dollar Retention (NDR) is a critical metric for subscription-based and SaaS businesses that measures how much recurring revenue is retained from existing customers over a specific period, after accounting for revenue expansion (such as upsells and cross-sells), downgrades, and churn. Unlike basic retention metrics, NDR provides a comprehensive view of both the losses and gains within your existing customer base, offering a more nuanced understanding of customer value and business health.

How NDR Works

NDR tracks the changes in revenue from your current customers, excluding any revenue from new customers acquired during the period. It reflects the net effect of customers upgrading (expanding), downgrading (contracting), or leaving (churning). This makes NDR a powerful indicator of whether your company is successfully growing revenue from its installed base or losing ground due to customer attrition or reduced usage.

NDR Formula

The standard formula for calculating Net Dollar Retention is:

• Starting MRR: Monthly recurring revenue at the beginning of the period

• Expansion MRR: Additional revenue from existing customers (upsells, cross-sells)

• Contraction MRR: Revenue lost due to downgrades by existing customers

• Churned MRR: Revenue lost from customers who cancel or do not renew

Example Calculation

If a company starts the month with $100,000 in MRR, gains $20,000 from upsells, loses $10,000 from downgrades, and $5,000 from churn, the NDR is:

An NDR above 100% means your existing customers are, on average, spending more over time, even after accounting for losses. An NDR below 100% signals that revenue from existing customers is shrinking.

Why NDR Matters

• Growth Indicator: A high NDR shows strong product-market fit, customer satisfaction, and successful expansion strategies. It's a key driver of sustainable, efficient growth.

• Benchmarking: NDR allows for apples-to-apples comparisons across companies and periods, as it's expressed as a percentage and excludes new customer revenue.

• Strategic Focus: Improving NDR often costs less than acquiring new customers, emphasizing the importance of customer success, upsell/cross-sell programs, and churn reduction.

Best Practices to Improve NDR

• Invest in customer success to drive adoption and satisfaction

• Identify and act on upsell and cross-sell opportunities

• Proactively address customer issues to prevent downgrades and churn

In summary, Net Dollar Retention is a vital metric that reveals how effectively your business retains and expands revenue from its existing customers. It provides actionable insights for growth, customer engagement, and long-term business health.