It’s tempting to boil the health of your business to top-line metrics like revenue growth and new customer acquisition. These metrics are easy to track and highlight the trajectory of your business at a high level. But looking at these metrics alone provides an incomplete picture of your business’s financial performance.
Measuring, monitoring, and managing more insightful metrics is key to gaining the information you need to run your company successfully. One of those metrics? Net Dollar Retention (NDR), which is a significant indicator of sustainable success for technology companies, particularly those with subscription-based models.
Unlike simpler metrics that only capture a snapshot of your business at a specific moment, NDR tells a comprehensive story of how your customer relationships evolve over time. This is important for Software-as-a-Service (SaaS) companies, as the true value of a customer relationship often manifests long after the initial sale.
In this article, we’ll go through what NDR is, why it’s so important, and strategies you can employ to drive sustainable growth for your business.
Want to learn more about the advanced metrics your tech company should be tracking? Check out this guide now: A Comprehensive Guide to Financial Metrics for Tech Companies
Understanding Net Dollar Retention (NDR)
NDR measures how much revenue a company retains from its existing customer base over time while accounting for customer growth and loss. NDR emphasizes revenue sustainability from your current base—a sign of how well your product resonates with your customers and adapts to their changing needs.
NDR includes:
- Expansion Revenue: Upgrades and cross-selling to current customers
- Contraction Revenue: Customers downgrading to lower subscription plans
- Churn: Revenue lost from customer cancellations
How to Calculate Net Dollar Retention
When calculating NDR, you analyze the entire customer base or individual customer cohorts to see how revenue has changed over a specific period. Here’s the formula:
The following are the four components of the formula:
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- Starting Revenue is the revenue from customers at the beginning of the period
- Expansion Revenue is additional revenue from upgrades or cross-sells from current customers
- Contraction Revenue is revenue lost due to downgrades
- Churn represents revenue lost from customers who canceled
An Example of Calculating Net Dollar Retention
Assume a SaaS company has $1,000,000 in monthly recurring revenue (MRR) at the start of the quarter. Over the quarter, they achieved an additional $200,000 from expansion revenue, lost $50,000 due to downgrades, and saw $100,000 in churn from cancellations.
In this example, the NDR is 105%, indicating a 5% revenue growth from existing customers. This is a signal that existing clients find increasing value in the company’s offerings, although in an ideal scenario, this NDR would be above 120%.
Why Net Dollar Retention is Important for Technology Companies
NDR is particularly valuable for subscription-based tech companies because it provides a clear measure of revenue stability and growth without needing new customer acquisition.
Efficient Growth Indicator
NDR is one of the most efficient growth indicators. It reflects how well a company can expand its revenue base by increasing value to existing customers rather than constantly seeking new ones. High NDR reflects:
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- Lower Customer Acquisition Cost (CAC) payback periods
- Higher lifetime value to CAC ratios
- Sustainable unit economics
- Improved cash flow and reduced dependency on new sales for growth
Customers who expand their usage over time typically need less onboarding and fewer support resources than new clients. This drives higher margins and enables more efficient scaling, a powerful advantage for any subscription-based business.
Product-Market Fit Validation
A strong NDR is one of the most reliable indicators of product-market fit, offering insights that other metrics may overlook. NDR can reveal that a product meets customer needs and continues to provide value over time. Below is what a strong or weak NDR might indicate:
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- High NDR: Your product delivers measurable value, customers find new use cases, pricing aligns with the value, and the product becomes embedded in customer workflows
- Low NDR: There could be a mismatch between price and value, implementation challenges, missing features, or competitive threats
Investor Appeal
NDR is a critical metric for investors who see it as a strong indicator of future growth potential. Companies with high NDR rates often attract higher valuations, even in highly competitive markets.
Here’s how NDR impacts investor perception:
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- A high NDR (120% or more) is often seen as a strong indicator of company’s health and can offset concerns about high CAC
- Investors regard high NDR as a sign of sustainable growth, suggesting the company can scale with lower capital needs
- Strong NDR contributes to valuation premiums by showing growth from existing customers—a signal of loyalty and market validation
What’s a Good Net Dollar Retention?
The SaaS industry generally considers an NDR of 100% or above as healthy, indicating stable revenue with no loss from the current customer base.
For SaaS and subscription-based companies, NDR benchmarks typically look like this:
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- Under 100%––Concerning: An NDR below 100% means that the company is losing more revenue from churn and contraction than it gains from expansion. This indicates a shrinking customer base and poor customer retention, which is a significant red flag, especially for a subscription-based business model.
- 100%+—Good: An NDR above 100% indicates that the company is successfully retaining all of its revenue from existing customers, offsetting any losses due to churn
- 110%+—Great: At this level, the company is achieving notable growth within its current customer base, a sign of successful upselling or cross-selling strategies.
- 120%+—Excellent: This suggests a strong product-market fit and that customers see increased value in the product over time.
- 130%+—Best-in-Class: An NDR above 130% signals exceptional growth from existing customers, often seen among leading companies in a category.
How to Improve Net Dollar Retention
We’ve talked a lot about what NDR is and why it’s so important. But the question remains: how do you improve it?
To improve NDR, you need a comprehensive strategy that focuses on customer success, strategic expansion, and careful monitoring.
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- Customer Success Programs: Proactively engage customers through regular check-ins and effective onboarding. Monitoring customer satisfaction and providing ongoing support can reduce churn and deepen loyalty.
- Upselling and Cross-selling: Identify opportunities for expansion by analyzing usage patterns and growth triggers to make it easy for customers to increase their usage and drive more revenue from existing accounts.
- Ongoing Monitoring and Analysis: Regularly track NDR trends and set up early warning systems to detect signs of potential churn.
- Product Enhancements: Continually improving your product based on customer needs and feedback can boost retention. Adding features or refining the user experience keeps customers engaged and invested in your product.
- Personalized Customer Communications: Tailor communications to address customer needs at each stage of their journey.
- Flexible Pricing Models: Offering tiered pricing or add-on options allows customers to scale with your product as their needs grow.
These strategies create a strong foundation for maximizing NDR by fostering customer loyalty, increasing revenue from existing clients, and sustaining long-term growth.
Get Support Refining Your Tech Company’s Approach to Financial Management
NDR isn’t just a simple metric to track—it’s an essential indicator of a company’s health, efficiency, and growth potential. For tech companies, particularly in the SaaS space, NDR is crucial for validating product-market fit, attracting investors, and creating reliable revenue streams.
Whether you're just starting to track NDR or looking to improve your existing metrics, having the right financial partner is crucial. G-Squared Partners can provide the expert financial support you need to track NDR alongside other key metrics, helping you make smarter, data-driven decisions.
If your company is ready to strengthen its financial reporting and analysis, contact G-Squared Partners today to learn more about building a sustainable, growth-focused financial strategy.
