Churn Prevention

Embracing net dollars: A look at the importance of Net Dollar Retention5 min read

Reading Time: 4 minutes The importance of Net Dollar Retention can't be overstated. It is an important metric that lets you know whether your subscription business is making profits or not.

May 5, 2022 4 min
retention chart

Embracing net dollars: A look at the importance of Net Dollar Retention5 min read

Reading Time: 4 minutes

Net dollar retention (NDR) is a big deal in the SaaS industry and a key performance indicator for SaaS companies. Of course, not many startups realise the importance of Net Dollar Retention, but it can lead to high growth and help sustain the business for many years in the future. But what exactly is Net Dollar Retention (NDR)? This post will explain what the term means and why it is crucial.

What is Net Dollar Retention (NDR)?

Net dollar retention (NDR) or net revenue retention (NRR) is a metric that measures the growth of monthly recurring revenue (MRR) or annual recurring revenue (ARR) over a certain period. It consists of several components, including negative churn, downgrades, and new subscriptions.

Negative churn is the percentage of customers who cancel their subscriptions in a given period. Downgrades are customers who downgrade their plans from one level to another and new subscriptions are new customers who subscribe to your service for the first time in a given period.

The importance of Net Dollar Retention

The importance of Net Dollar Retention cannot be overstated. This metric is important because it helps you determine how much new business you’re getting and your ability to retain existing clients.

When NDR increases, your customers are upgrading or adding new subscriptions. On the other hand, if NDR declines, it could mean that some of your customers are downgrading their accounts or cancelling altogether. If you know what percentage of revenue comes from existing clients, you can optimise efforts and resources accordingly.

How to calculate Net Dollar Retention

The NDR is calculated by totalling all your annual recurring revenue for that year, including new subscriptions and upgrades. Then take away any churn from that number and divide the answer by your original ARR:

The equation looks like this: [(ARR + new subscriptions + upgrades) – churn] / ARR

For example, if you started with £5,000 in annual recurring revenue, added £3,000 in new subscriptions and upgrades and lost £1,500 in churn, your NDR would be: (5000 + 3000 – 1500) / 5000 = 1.2 or 120%.

What is a good NDR?

A good net dollar retention rate is at least 100%. However, 120% or higher is considered an excellent net dollar retention rate. If it’s less than 100%, that means you spent more money to acquire those clients than they’re giving you back. That’s not good news!

To achieve a high net dollar retention rate, you need to keep your existing customers happy and engaged. Of course, you need to make sure they’re getting value out of your product or service before they are willing to pay more for it.

How to improve Net Dollar Retention (NDR)

If you want to improve your NDR, you can do a few things. Here are some of them:

Determine where your company is falling short

Take some time to determine where your company is falling short when it comes to retaining customers. You might be surprised by what you find! We recommend creating a survey that asks questions like:

• What kept you from renewing?
• What would have made you more likely to renew?
• Do you think we provide good customer service?

These results will help identify areas where there’s friction in the renewal process and areas where improvements need to be made for your customers to feel confident staying with you long term.

Remove friction in the renewal process

Make it easy for your customers to stay subscribed by making the process painless. You can do this by offering automatic renewals and ensuring there are no hoops to jump through when customers want to re-subscribe.

Apply the 80/20 rule to your subscriptions

The 80/20 rule is a common business practice that states that 80% of results come from 20% of actions. If you have ten different subscription plans for your product or service, three of those plans can generate 80% of your revenue. Focusing on these three plans and improving them, can significantly increase your net dollar retention (NDR) rate.

Provide fast and helpful customer support

Customers want answers, and they want them fast. If they have questions about your product or service and aren’t able to reach someone at your company for hours on end (or worse, never hear back), then there’s a good chance they’ll go elsewhere for their needs.

Increase MRR from upsells and cross-sells

Upselling means offering an upgrade or add-on to a customer when they purchase something else from you. Cross-selling means offering another product that complements the original purchase. Both offers are excellent ways to increase MRR without losing any customers, making them very attractive investments in improving your NDR.

Focus on churn prevention, not just churn reduction

Most subscription businesses focus on reducing churn. While that might work, it doesn’t really fix the problem. Here are a few things you can do to prevent churn.

Offer a rewards program

If your clients are getting something out of their relationship with you, they’re more likely to stay engaged. If they remain engaged, they’ll be less likely to churn. Creating an incentive program is an excellent way for customers to feel like they’re getting extra value for their money, and keep them coming back for more.

Create a referral program

Create a referral program where existing customers get rewards for recommending new clients and new clients get incentives for signing up with their recommendations. A referral program is a win-win for you, your existing clients, and the new clients.

Free trial periods

Free trial periods allow new customers to try out your product or service for a limited time before committing. This lets them see if what you offer works for them before becoming a full-fledged customer.

Salvage offers

Take a sledge hammer to your churn rate, and start incentivising your subscribers to stay. Your average LTV will thank you for it.

If your churn rate or LTV is holding you back, we can provide a solution. We help companies grow their customer base by designing strategies to improve customer retention and loyalty. Get started for free today.

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