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Net Dollar Retention

Most people judge the performance of a SaaS-company on its MRR, while judging a company on its NDR might give much more valuable insight. Why? Well, it’s not uncommon that a company’s MRR increases while their NDR deteriorates. In other words, you’re bleeding money.

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Net Dollar Retention

  • – What is NDR?
  • – Why is it important?
  • – How to calculate your NDR?
  • – Improving NDR!

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What is Net Dollar Retention?

NDR stands for Net Dollar Retention. It’s a metric, expressed as a percentage. It compares a company’s revenue from retaining current users and compares that to another period, taking into account downgrades, upgrades and churn. NDR is not as well known as MRR, but it might even be a more valuable metric – especially for SaaS-entrepreneurs.

Why is NDR so important? First and foremost, we should have a look at the downside of MRR. It is quite possible that you grow your MRR while bleeding money. This occurs when your marketing department is on fire and the acquisition of new users creates a revenue stream exceeding the net reduction in revenue from your existing user base.

Let’s say your company starts this month with €100,000 in MRR. It books €50,000 in new subscriptions, zero in expansion revenue, suffers €20,000 in downgrades and €5,000 in churn. All in all, your MRR rose with a whopping 50%. You could bring out the champagne for that, if it weren’t for your NDR only being at 75%. You lost 25% of MRR from your current user base. And what was your marketing budget? How much money did you spend on acquiring these new users? Most probably, money has been leaking from your business…

To grasp the concept of Net Dollar Retention, you must understand expansion (by marketing), downgrades (of packages) and churn, and their effect on monthly recurring revenue (MRR).

Increases in MRR

Generally, MRR can increase via two mechanisms:

  • Through newly onboarded customers.
  • Through an increase in usage or upgrades within your existing customer base.

Simply put, MRR increases when your existing customers start spending more on your product, for example, when you upgrade a standard subscription to a premium subscription or when your marketing department does a bang-up job. An example of the first would be a user upgrading from a €10 basic subscription to a €50 premium subscription. The expansion revenue, in this case, would be €40 or the net increase resulting from the upgrade.

€50-€10 = €40 increase in MRR.
mrr decreases in net dollar retention

Decreases in MRR

Life can be hard, especially when being a SaaS entrepreneur. Sometimes you lose clients, which decreases your MRR. This can happen in two ways:

  • Through downgrades in usage within your existing customer base.
  • Through churn, where customers cease to do business with you.

Downgrades are any decrease in revenue caused by downgrading in usage. Basically, that’s the opposite from our previous example. A downgrade would be a user moving from a €50 premium subscription to a €10 basic subscription. The downgrade in revenue, in this case, would be €40, which is the net decrease resulting from the downgrade.

€10-€50 = €40 decrease in MRR

Churn

Churn means losing customers. That’s why we define it as a disaster. An example of churn is a user completely leaving the platform from a €50 subscription. The churn would be €50, which is the net loss resulting from the user leaving your platform.

Calculating Net Dollar Retention

NDR accounts for the changes in MRR caused by expansion, upgrades, downgrade, and churn within an existing customer base.

It’s expressed as a percentage and calculated using the following equation:

(Starting MRR + expansion - downgrades - churn) / Starting MRR * 100 = NDR

For example, a company starts the month with €10,000 in recurring revenue. Over the month, it added €2,500 in expansion revenue, lost €1,000 in downgrades and had a churn of €500.

(€10,000 + €2,500 – €1,000 – €500) / €10,000 * 110 = 110% NDR.

The company now has €11,000 in MRR, due to an NDR of 110%

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Making use of NDR (Net Dollar Retention)

A Net Dollar Retention below 100% means churn and downgrades were greater than the growth you realized with your existing customers. You are losing users or they’re spending less on your product. The role your product plays in their life is not significant enough. They can do without you. Or, at least, with less of you. Both are a little painful.

It’s like being dumped.

If this analogy seems a little far-fetched, we tend to disagree. People don’t leave something they really love. Or, in this case, a product they truly love. Maybe you’re just not loveable enough. Maybe it’s time to invest in the relationship with your users.

Optimizing your Net Dollar Retention (Or: making your users love you more)

There are many ways to optimize your NDR. Your customer success team has a tremendous job to do. You have to handle your user feedback well and implement desired improvements and add new valuable features rapidly and appropriately. When it comes to topics like these, you should get in touch with Amsterdam Standard, GlobalOrange, or saasmore.

YouSir can help you become more lovable though. We help you become more valuable to your users, become something they simply can’t and don’t want to miss. Become something they only want more of.

Instead of focussing on bare functionality, we always take the relationship between the user and the product into consideration when designing a product. You might call us hopeless romantics. Indeed, there are quite a few similarities between a romantic relationship and the way people interact with a digital product. That’s why we googled reasons why relationships end. Thanks to bustle.com, we found out these were the most prominent reasons.

Reason #1: Lack Of Communication

Ask yourself: does your product communicate with the user? If so, how does it do that? Does your application communicate clearly what the user can do on a certain screen? Can users provide feedback when they want to? Is the purpose of each screen clear? Does your design communicate a clear message? Does it enable you to listen?

“Communication is integral in a relationship, but if you and your partner don’t communicate much, or don’t communicate well, it could spell trouble. “You may think your relationship is ‘perfect,’ but have you asked your partner what they think?”.

Kelsey M. Latimer, Ph.D.

Reason #2: The Couple Grows Apart

Naturally, you and/or your partner change as life goes on and as your relationship evolves, and these changes may make your “perfect” relationship start to feel not-so-perfect.

Over time, the users of your application change. Their demands change. It’s up to you to keep up with them and meet their needs. Like your users, your application should evolve. It should grow over time in order to keep on pleasing and surprising them. You should hand them small, valuable gifts from time to time. Give them compliments and get them involved in honest conversations. Design your application to grow together with your users, both emotionally and conversationally. Design your application in such a way that it can keep the spark alive.

Reason #3: The Relationship Stops Growing

“When a relationship feels ‘perfect’ to the people in it, it could be because there isn’t anywhere to grow,” Elkerson says. “Things are working, sure, but introducing something new might not be possible because things are working so well — which leads to a feeling of stagnation and restlessness with the rut of being perfect.”

A relationship should be challenging – or at least challenging enough. Are you challenging your users? Is the design of your application doing so? Or are you just doing what you told your users what you would do? Things as simple as taking out the trash on Mondays, making sure the finances are in order, and bringing home Thai food on Thursday? These things are undoubtedly reliable, and there’s something to be said about that, but they’re also rather boring. They are not very challenging, to say the least. Does it feel like it’s time to introduce some playfulness in your relationship with the user? Maybe some gamification?

Reason #4: Betrayal Occurs

Betrayal doesn’t occur without reason. There is always a trigger to start looking around. Maybe your product is not that attentive to the needs of your customers anymore. Perhaps the user misses excitement? Some surprises? When was the last time you bought your user flowers? Did you add the feature he was longing for? Or did you make a design improvement to make the feel more pleasant and playful? These small details of dissatisfaction will provoke users to look around. Questions like “Maybe I was too fast with my choice?” and “Maybe there are better solutions on the market?” start to pop up in your user’s head. You need to listen to your users’ needs to make them happy. When a user is happy, there is no reason to look around and leave you for your competitor.

Reason #5: One Partner Avoids Conflict

Some people don’t like to break up relationships. Even when they know a relationship doesn’t work anymore, they are not brave enough to put an end to it. Meanwhile, the relationship is steadily getting worse. Some users act like this as well. They hang up on a free or basic plan of your SaaS product. They don’t use it often. They never recommend your product to acquaintances. As they like to complain, all their friends know that you are not as good as you were before.

Maybe they haven’t even mentioned that you were any good at all. That’s painful for you. It’s hard to change user opinion when it goes that far. Try to build trustworthy relationships with your users from the beginning of their lifecycle, encourage them to talk to you, and give them feedback. Analyze their user experience to see if they experience difficulties. This way, you notice when something starts going wrong. Maybe you need to implement the conversation design to let your users talk to you. Through the conversation and your attention, you can find out the conflict, solve it, and make your users happy.

Reason #6: The Couple Is On Different Life Paths

You meet a handsome person who rocks a nice outfit, is well-known in certain circles and has a good reputation. Once you start dating, you find out the person is not quite like you imagined. His or her goals are different from yours, you have a different sense of humor and have different ideas of spending your free time. You decide to break up the relationship, because the person is not like you expected.

The same thing can happen with your digital product. You appear on the market, beautifully-designed, quite hip, and with some good reviews. The user decides to give it a try, since you seem to be the number one choice! The website doesn’t provide detailed information about who benefits from your product, which exact problems it solves and how it does that.

There is no trial period available, so the user decides to use it based on assumptions and good marketing. During the onboarding process, the user realizes your product is not a good fit. The signup process’s lack of information made the user believe you were the one, but it turned out you’re not. This user has other issues to solve and your product doesn’t help with that. That’s why the user will leave you.

You could avoid this situation from happening. Give clear and detailed information on your marketing website, offer a trial period, and create an exceptional signup flow. This way, you add value. Even if a visitor doesn’t turn out to be your customer now, make sure they get an excellent impression so they have a reason to come back later or recommend you to others.

Reason #7: One Partner Focuses On A Superficial Connection Vs. A Deeper One

Used, abused, and refused? This impression can arise while dealing with a digital product as well. The user can feel so when you collect a lot of information in the signup process but don’t give much value in return. Or when the product’s functionality works as a clock but lacks personalization and human connection. The user might be looking for a deeper relationship with your brand and product. Don’t aim just for profit. Build this connection and provide the support your users want.

Reason #8: One Partner Becomes Selfish

When the other person in the relationship stops caring about you and satisfies just his interests, it’s time to leave. That’s what users do when you care only about yourself (your business, your profit) instead of meeting their needs and supporting them in their journey. Create a Human design; update and scale up your digital product regarding your customers’ needs to show them your affection and love.

Reason #9: One Partner Experiences Grief Or Loss

For someone whose partner is suffering from grief or loss, it’s common to feel the urge to help without knowing how to help. Although it might sound obvious, the most important thing is to be there for your partner and to be supportive in any way you can. Being flexible is the most important part of this. If your partner wants time for him or herself, you may need to let this happen. Sometimes, the best way to be supportive is to back away a bit. And if they want to talk about things, you may need to be ready to listen and help them express themselves.

Quite the same thing goes for your product. You don’t know what situation your users are in and what their emotional status is. Try to be there for your users when they need you. Make your product run smoothly, compile a pricing package flexible enough to change on request, and prepare your customer support team to help whenever necessary. Carve your signup, onboarding, retention, and cancellation flows to perfection, and make your UI shine. A pleasant interaction process with your product might help your customers cheer up.