The NDR measures the net revenue leftover in a set period, considering the total revenue minus any revenue from downgrades or churn, plus revenue from expansion due to upsells, cross-sells, and upgrades.
The formula includes current MRR, expansion revenue, downgrades, and churn.
NDR = [(Starting MRR + expansion — downgrades — churn) / Starting MRR] * 100%
* If you’re more comfortable with annual calculations, you can go ahead and switch the MRR inputs with ARR values. Although, it is recommended to perform monthly calculations as well to dig deeper into the components that make up your net revenue retention.
Monthly Recurring Revenue(MRR): The predictable recurring revenue earned from subscriptions in a particular month. (MRR * 12 = ARR)
Expansion MRR: The additional MRR from all customers who have upgraded to a higher pricing plan from a lower-priced plan or purchased a recurring add-on, including MRR contribution from reactivation of a previously canceled subscription and free-to-paid conversions.
Churned MRR (or Cancellation MRR): (A component of Contraction MRR) The MRR lost due to canceled or churned subscriptions.
Contraction MRR: The MRR lost due to cancellations, downgrades to lower price plans, removal of recurring add-ons, or even because of availing discounts.
Company A starts the month with $10000 in recurring revenue. Over the month, it adds $3000 in expansion revenue, $1500 in downgrades, and $500 in churn.
NDR = 110%
MRR = $11000
Company B starts the month with $10000 in recurring revenue. Over the month, it does not see any expansion revenue but adds $5000 in new subscriptions, $1500 in downgrades, and $1000 in churn.
NDR = 75%
MRR = $12500
By looking at the MRRs alone, you would say that Company B fairs better. However, going by the NDRs, not so much. This is where calculating NDR plays a pivotal role in recurring revenue valuation for SaaS companies.
Looking at the above examples, you can see that NDR gives a comprehensive view regarding the shifts in MRR changes. Without measuring NDR, we wouldn’t have caught the revenue leak caused by downgrades and churn in Company B despite an increase in MRR. This also shows that Company A, despite not having gained new customers, has a better retention game, which is what Company B should be focusing on to improve its NDR and long-term revenue health.
An NDR >= 100% denotes a net positive MRR, whereas an NDR <100% denotes a net negative MRR. Hence, an NDR > 100% - the higher, the better - should be the aim.
And high NDRs are something markets, and investors take note of. Here are the NDRs of a few successful scale-ups on their IPO day:
Snowflake - 169%
Twilio - 155%
Datadog - 146%
Slack - 143%
Zoom - 140%
There aren’t any hard and fast benchmarks, but going by the data (that you see above), if your net dollar retention rate is:
100% or below, figure out what could be causing this.
110%, you’re at the median.
120-130% and above, you’re on the right track.
Gross Dollar Retention (GDR) - aka Gross Revenue Retention (GRR) - rate is similar to the NDR in that it measures the changes in recurring revenue caused due to shifts within the revenue from existing customers.
However, the GDR considers only the total revenue minus any revenue from downgrades or churn and does not account for the revenue from expansion due to upsells, cross-sells, and upgrades. Additionally, the GDR measures the net revenue over time as opposed to a set time period like the NDR.
Gross revenue retention is always
<= net revenue retention
Compared to NDR, the GDR is more a long-term indicator for revenue retention and is a better churn indicator.
For a comprehensive picture of churn, it is essential to look at both SaaS metrics - NDR and GDR. High NDRs and GDRs are necessary numbers to make for a tempting investment opportunity.
Focus on Customer Retention to Beat Churn
Did you know that customer acquisition cost (CAC) can be five times more than the cost of retaining your current customers? Apart from that, there are several benefits to retaining customers like increasing customer lifetime value (LTV), creating a loyal customer base, word-of-mouth promotion, and most importantly - boosting your NDR.
Methods of retention like
smooth customer onboarding,
creating an amazing user experience,
diversifying your offerings,
optimizing product pricing, and so on,
will not only help improve your retention rates and reduce churn, but it will lead to a great NDR that will have investors banging at your doors. For more information on the best retention strategies, visit our blog: 10 Customer Retention Strategies to Up Your Retention Game.