Published August 16, 2022
Net dollar retention (NDR) is a key metric for subscription businesses, one they have to increase to succeed. Why is it so important, and what can you do to improve it?
NDR is the percentage of revenue from current customers that a business retains year-on-year, taking into account upgrades, downgrades, and churn. It shows how much of its revenue a company keeps from month to month without bringing in new customers.
High net dollar retention indicates that a company is keeping its customers happy. One calculation of NDR rates at 36 prominent SaaS companies found that the median rate was around 104-106%, with the top 10 achieving over 125%. Using this as a benchmark, net dollar retention for SaaS could be considered average at around 105%, while you should be looking for 110% or above for a good NDR.
Low NDR indicates that a company has serious problems with either its core product or its client management. Revenue intelligence can help you to understand where the money is going, but it won’t fix the problem. This is an area that relies on good work from a client success team.
Given its importance, how can you improve net dollar retention?
Drops in the annual NDR rate usually come from clients giving up on a company and its services. If you can offer more value to customers, you can reduce the chances of them cancelling their subscription, and so keep the revenue flowing. This adds to the lifetime value of the individual customer.
A campaign to improve customer lifetime value involves focusing on happy customers and keeping them that way. There are many ways to increase customer lifetime retention, such as:
Which incentives you use will depend upon the options your products can offer and what other steps are practical for your company. That said, some steps are universal. Good B2B client management, building positive, trusting relationships, will lead to happier clients. As long as your customers feel wanted and taken care of, they will have a reason to stay.
The flip side of improving customer relations is reducing churn.
Net dollar retention vs churn is an eternal battle for SaaS companies. Customers dropping their subscriptions reduce the company’s revenues. If losses outweigh new subscribers and increased payments, they can take NDR below 100%, at which point the company is in trouble.
It takes active work to keep customers from cancelling their subscriptions. A systematic approach to this is vital for client success teams. A smooth client journey rests on a scaffolding of behind-the-scenes work, including client management coaching and detailed action item lists for the team to follow. The right team with a good client intelligence platform can make all the difference to retaining and growing client revenues by keeping customers happy.
Beyond that infrastructure, there are many ways to keep a customer invested. You can reduce churn by improving the product, offering discounts, or providing better customer service than competitors. While some of this is long-term work, it’s worth having immediate actions like discounts ready for when a customer starts to wobble.
Ultimately, if your incentives can’t meet the interests of a specific customer, then you’re going to lose them, but the work you put into reducing churn is foundational to maintaining good net dollar retention.
It might sound paradoxical when we’ve been discussing deals and discounts, but an increase in prices can improve NDR.
If a customer is happy with the product or service you provide, they may also be willing to pay more for it. If you have lots of happy customers, and your price hasn’t changed in a while, then it’s worth considering a price increase, to earn more out of your customer base.
There are risks to this strategy, as it can put off customers on a tight budget. But by increasing the price of your product or service, you can help offset revenue lost to churn.
While a lot of discussion about the meaning of net dollar retention focuses on existing products, there’s another side to the equation: offering new products or services.
In an ever-changing market, you can’t rely on your current product to bring in revenue. There are limits to how many people will have an interest in one product, and over time, their need for that product may drop. To maintain and improve your current NDR, consider creating new services or products to complement your portfolio.
One reason for adding new products or services is to attract new customers. Clients who aren’t interested in your virtual assistant might be willing to pay out for a client intelligence platform. More products mean a broader customer pool, which is particularly useful in protecting your net dollar retention when client companies collapse or key markets shift.
New products and services are also useful in getting more revenue out of your existing clients. While they serve different purposes, the client using that virtual assistant might also be interested in your client intelligence platform. This is particularly true for related and complementary products, which are perfect for upselling and cross-selling. New offerings will keep existing clients from getting bored, give them a reason to increase their subscriptions, and ensure they stay with you for longer.
NDR is one of the most important measures for success, particularly among companies providing a subscription service. By paying attention to lifetime value, reducing churn, raising prices, and offering new products, you can maintain a positive balance and improve your revenues.