Guide
Jun 15, 2022
Explore how to calculate net dollar retention, a key metric that shows how your revenue grows or shrinks over time and indicates the overall health of your company.
Net dollar retention rate (NDR) is a key revenue-measuring metric that helps companies understand not only their revenue earned (and how it’s changed over time), but the factors that are impacting its shrinking or growth during that period.
This important metric helps companies move beyond revenue tunnel-vision and consider all of the factors related to RevOps (customer success, in particular) that impact revenue trends and growth potential.
Read on for everything you need to know about net dollar retention, how to achieve it, and how it’s connected to RevOps.
Quick Takeaways
- Net dollar retention measures how much your revenue grows or shrinks over a given time period.
- The hallmark of net dollar retention is its inclusion of customer success as a key revenue impacting factor.
- RevOps can drive a healthy net dollar retention rate by optimizing people, processes, and technologies and keeping customer-driven growth strategies at the top of the priority list.
What is net dollar retention?
By definition, net dollar retention (NDR) is a measurement of how much your annual recurring revenue (ARR) or monthly recurring revenue (MRR) grows and shrinks over time. It uses your regular ARR or MRR calculation, then factors in customer expansion, downgrades, and churn.
Net dollar retention digs deeper into revenue metrics to assess how current customer behavior is impacting it. Why is this important? Because a simple look at revenue doesn’t always tell the whole story about company growth.
Consider two companies that both have a monthly revenue of $50,000. The first company is a buzzed-about new startup that acquired dozens of new customers throughout the month. The second is an established company that lost 10 existing customers that month.
Which company would you consider to have higher growth potential? The first, of course, but revenue alone would not be enough information to reach that conclusion.
NDR provides a data-driven snapshot of how well your business is engaging and retaining its customers. Business stakeholders like C-suite execs, board members, and investors value NDR as a metric indicative of the overall health and internal alignment of an organization.
Why is net dollar retention important to SaaS companies?
Net dollar retention is especially important to SaaS companies because they use a subscription based business model — one that requires customers to periodically renew services in order to retain them. As such, customer retention is a huge driver of SaaS revenue and growth.
Metrics like net dollar retention that base a company’s growth assessment on factors related to customer satisfaction align with SaaS business models and put customers at the center of growth strategy development.
As a SaaS company, tracking net dollar retention can help you holistically understand how your customer engagement strategies impact your current growth trajectory. It can also expand your view of growth beyond new subscriptions and create motivation for other retention-driven revenue opportunities such as upselling or cross-selling.
How do you achieve a good Net Dollar Retention Rate?
So what exactly constitutes a good NDR? Think of it this way: net dollar retention shows you the percentage of your current business that you’ve been able to keep and/or grow within a specific time frame (monthly or annually). A net dollar retention rate of 100%, then, means you stayed flat during that time.
The definition of good as it relates to NDR will really depend on where your company stood when you first started to measure it and whether or not you’ve hit net dollar retention targets you set for your company.
That said, anything between 100-110% is considered healthy, and 120% or higher would be considered outstanding.
The connection between Net Dollar Retention and RevOps
If you think about revenue like we do, you know that revenue operations (RevOps) is the most effective approach to long-term growth. A healthy net dollar retention is perhaps the most important revenue metric for RevOps organizations to track because it encompasses all of the drivers that mark its success: high customer retention and satisfaction, minimal churn, and revenue growth.
Let’s look at some specific ways RevOps drives a healthy net dollar retention rate.
Guide
Apr 19, 2022
The Road to RevOps
Connects customer success and revenue
Companies that take a strictly sales-focused approach to revenue growth are a step behind in today’s buyer- and customer-driven market. RevOps organizations know that a seamless customer experience is a key driver of revenue. They consider customer success an important revenue-impacting department, and categorize it as such alongside other go-to-market teams such as marketing and sales.
Ideally, customer success is even placed directly under the Chief Revenue Officer, who aligns it with other go to market teams like sales, finance, and marketing.
Requires a data-driven approach
One of the top aims of the RevOps is to optimize technologies and processes to centralize and streamline the use of data. When data is more efficiently collected and analyzed, it can be readily available to be used for ongoing performance assessments like monthly or annual NDR calculations.
Puts growth at the top of the priority list
Revenue is a top priority for every company — it’s the premise upon which business runs. But what about growth? RevOps organizations are forward-thinking. They know that success lies not in a simple revenue number but in the ability to design organizations to be agile, aligned, and focused on growth.
Net dollar retention ultimately indicates how simpler metrics can be combined to indicate a company’s current growth trajectory and future growth potential. Growth, of course, is at the center of the entire RevOps approach.
Promotes organization-wide collaboration
The equation to calculate net dollar retention demonstrates the importance of considering varied factors in your growth strategy. Similarly, RevOps organizations know revenue is not just a sales or finance objective.
Instead, RevOps requires the cross-collaboration of every revenue-impacting team — sales, finance, marketing, and customers success — to execute an end-to-end effort to increase growth. NDR, then, is a metric that shows exactly how well this RevOps alignment is working in practice.
Over to You
Measuring key revenue KPIs is essential for any company to grow. Calculating net dollar retention as part of that process will give you a deeper view of your company’s revenue and growth, and inform actions to continually optimize it.
Xactly’s Agile Revenue Performance Management solutions can help you implement RevOps processes that are collaborative, automated, data-informed, and continuous. Learn more about our solutions or request a demo today.
