The Net Dollar Retention (NDR) rate, also referred to as Net Revenue Retention (NRR), gauges variations in recurring revenue brought on by changes in the income from the base of current clients. The NDR quantifies the net revenue that is left over after subtracting any income loss from downgrades or churn and adding any income from cross-selling, upsells, and upgrades.
NDR is among the most crucial KPIs for client retention in the SaaS business sector. This indicator aids in understanding how your revenue development from repeat business has changed over time.
The Net Dollar Retention is often computed on a monthly or yearly basis. A low NDR indicates that your clients may downgrade or completely discontinue their subscriptions. It enables you to determine if your product or service can satisfy clients’ demands and draw them in. If you can’t keep them interested, they’ll ultimately go elsewhere.
Additionally, Net Dollar Retention enables firms to maintain strong financial results and raise client lifetime value. It is also a crucial sign of a strong and successful company since it helps you assess the caliber of the business’ customers’ success. Investors and markets often pay attention to and look for businesses with high NDRs.
NDR sheds information on SaaS companies’ development and account expansion strategies in addition to client retention. An NDR above 100% shows a net positive Monthly Recurring Revenue (MRR), and an NDR below 100% indicates a net negative Monthly Recurring Revenue. Therefore, an NDR above 100% should be the goal of any SaaS business; the greater, the better.
The proportion of the initial Monthly Recurring Revenue (MRR) still in the business account after a certain time period is known as the Net Dollar Retention Rate.
To calculate, add the business expansion MRR to the initial MRR to get the SaaS NDR. Next, take the figure and remove your MRR for downgrades and churn. Then, divide the result by the initial MRR. Since Net Dollar Retention is expressed in percentages, multiply the ratio by 100%.
Here, the initial Monthly Recurring Revenue (MRR) represents the potential income the business may generate in the month.
The increased MRR from existing clients who have converted from a lower to a higher pricing scheme or bought a periodic add-on, and MRR addition from reactivating a formerly terminated subscription and free-to-paid transitions, is known as expansion MRR.
The MRR lost due to terminated or churned subscriptions throughout the month is included in churned MRR.
Downgrade MRR is the counterpart of expansion MRR and tracks the monthly revenue loss brought on by current customers downgrading their plans.
Change the MRR inputs to ARR values if you feel more at ease doing yearly computations. However, it is advised to also do monthly computations to delve further into the elements that go into your net revenue retention.
To calculator NDR or Net Dollar Retention rate, the following formula can be used:
Let’s understand how to calculate with the formula using the example below.
We’re going to two SaaS companies for the month of July.
The month begins with $10,000 in recurring income for Company XYZ. It generates $3000 in expansion MRR over the course of the month with several upgrades, loses $1,500 due to downgrades, and $500 in churn.
Company ABC also starts with an initial MRR is $10,000. It does not see any income growth over the month but adds $5,000 with new subscribers. It loses $1,500 due to some downgrades and $1000 in churn.
From the data above:
For Company XYZ:
Initial MRR = $10,000
Expansion MRR = $3,000
Churned MRR = $500
Downgrade MRR = $1,500
The total MRR at the end of the month = the sum of all the MRR
Therefore for Company XYZ, the total MRR = $11,000
For Company ABC:
Initial MRR = $10,000
Expansion MRR = $0
Churned MRR = $1,500
Downgrade MRR = $1,000
MRR from new clients = $5,000
Therefore for Company ABC, the total MRR = $12,500
We consider expansion MRR only from existing clients to calculate Net Dollar Revenue. NDR for each company will be calculated using the formula:
Net Dollar Retention rate (in percentage) = [(Initial MRR + expansion MRR – Churned MRR – Downgrade MRR) / Initial MRR] x 100
NDR for XYZ = [$(10,000 + 3,000 – 500 – 1,500) / 10,000) x 100
NDR for ABC = [$(10,000 – 1,500 – 1,000) / 10,000) x 100 = 75%
If you just considered MRRs, you may conclude that Company B performs better. However, according to the NDRs, you can not draw the same conclusion. This is why estimating NDR is crucial in recurring revenue valuation for SaaS enterprises.