Why your SaaS success is all about ‘Net Dollar Retention’

If you’ve ever marketed 101, you’ve learned that having customers is a lot more profitable than acquiring new customers. It is an old piece of knowledge but still valid today.

Unfortunately, many SaaS companies forget about it and focus their efforts on generating new leads. The cost of acquiring new customers is very high, really quickly. And if you are unable to bind your user to your product, then it is completely useless.

Most people judge a SaaS-company performance on its MRR, while judging a company on its NDR can give a lot of valuable insight.

Why? Well, it is not uncommon that a company’s MRR increases while their NDR deteriorates. In other words, the company has bleeding.

One might argue that the NDR is much greater than the number; It determines how much your customers value or love your product and how much impact you’re making on their lives … I’d say that Customer Lifetime Value (LTV) is one of the most important metrics for SaaS companies. Is one.

Keeping this in mind, an upgrade or downgrade and churn should be considered in view of the performance of a company.

What is Net Dollar Retention?

NDR is a metric expressed as a percentage. It shows the amount (change in amount) of revenue from existing users that a company can maintain in comparison to another period with downgrades, upgrades and account churns.

NDR, or Net Dollar Retention, Is not well known as MRR, but is a very valuable (if not more valuable) metric. Especially for SaaS-entrepreneurs. Why is NDR so important? Well, the first and important fact for me is that it is very possible to increase your MRR while losing money.

This scenario occurs when your marketing department is on fire. The acquisition of new users creates a revenue stream that exceeds the net decrease in revenue from your existing user base.

Suppose your company starts the month with € 100,000 in MRR. It pays € 50,000 in new subscriptions, zero in expansion revenue, € 20,000 in downgrades, and € 5,000 in churn.

In this example, your MRR increased by 50%. And yes, you should bring him champagne. But, your NDR is only 75%. You have lost 25% MRR from your current userbase. Also, what was your marketing budget? How much did you spend to get these new users? Money is being leaked from your business…

To understand net dollar retention, you need to consider expansion (by marketing), downgrades (out of packages), and all churns, and their impact on monthly recurring revenue (MRR).

Before we address the imperative of NDR, let’s dig a little more deeply into what this means.

MRR increases

MRR can increase through two broad mechanisms:

  • Through new onboarded customers
  • Through an increase in usage or upgrades within your existing customer base

Simply put, MRR increases when your existing customers start spending more on your product. For example, by upgrading a standard membership to a premium membership. Or when your marketing department does a bang job.

An earlier example would be a user upgrade from a € 10 membership to a € 50 premium membership. In this case, the expansion revenue would result in € 40 or a net increase.

€ 50- € 10 = € 40 MRR increase

MRR decreases

Life can be difficult, especially when you are a mother-in-law. Sometimes you lose a client, this reduces your MRR. This can happen in two ways:

  • Through a decline in usage within your existing customer base
  • Through brainstorming, where customers stop you from doing business

A downgrade is any reduction in revenue caused by a downgrade in use, which is basically the opposite of our previous example.

A downgrade will be a user moving from a € 50 basic premium membership to a € 10 basic subscription. The decline in revenue, in this case, would be € 40, which is a net decrease due to the decline.

€ 10- € 50 = (€ 40)

Brainstorm

I define churn as one Disaster. Or, more lightly placed as users are lost.

An example of churn is a user leaving the platform with a € 50 subscription. The churn will be € 50, with net loss resulting from the user leaving your platform.

But by that way, let’s get to the meat of this article.

Being counted Net dollar retention

NDR accounts for changes in MRR due to expansion, upgrades, downgrades, and churn within the existing customer base.

It is expressed as a percentage and is calculated using the following equation.

(MRR + extension – downgrade – starting churn) / starting MRR * 100 = NDR

For example, a company starts with € 10,000 a month in recurring revenue. In the month, it added € 2,500 to expansion revenue, € 1,000 in downgrades and another € 500 in churn.

(€ 10,000 + € 2,500 – € 1,000 – € 500) / € 10,000 * 100 = 110% NDR

The company now has € 11,000 in MRR and due to 110% NDR

Using NDR

Net dollar retention below 100% meant that churn and decline were huge compared to the growth you felt with your current customers. You are losing users, or they are spending less on your product. The role your product plays in their life is not important enough. They can do without you. Or, less with you. Both are kinda painful.

It is like being dumped.

If this analogy seems a bit off, but I disagree. People do not give up something they really like. Or, in this case, a product they really love. Maybe, just maybe, you’re not cute enough, and it’s time to invest in a relationship.

How to improve NDR?

If your NDR is bad, don’t worry. I have worked with many SaaS companies with my team and we have seen that this is more than possible Churn and turn your negative NDR into a positive one.

Of course, there are plenty of ways to turn on NDR, but the most experience I have is through human-centric design. A human connection made directly into your application will make your users fall in love and ensure that they stay with you for as long as possible.

Design helps you love your product with choice. what does this mean? Okay, your marketing efforts are more fruitful, your customers are more positive, and VC is banging on your door. Invest in the advanced design of your SaaS product to ensure that your users never leave you now.

So calculate your NDR and find the best way to get it where you want it.

Published February 12, 2021 – 08:00 UTC