Net dollar retention (NDR)

Definition

Net dollar retention is a key metric for any subscription business. It's a measure of how much revenue a company retains from its customers on a net basis, after accounting for churn. In other words, it's a way to gauge whether a company is growing its business by acquiring new customers, or simply holding on to the ones it already has.

It is also commonly referred to as Net retention rate or Net revenue retention. On the revenue side this includes expansion revenue (upsells, crossells) and the churn is formed from (cancellations, downgrades and contract expirations).

The Net dollar retention rate is a good way to measure a company's health over time. If a company is growing its business, you would expect to see a positive net dollar retention rate. If a company is losing customers, you would expect to see a negative net dollar retention rate.

There are a few things to keep in mind when interpreting Net dollar retention rates. First, it's important to remember that net dollar retention only measures recurring revenue. It doesn't take into account one-time or non-recurring revenue. Second, Net dollar retention rates can be affected by changes in pricing. If a company raises its prices, it will likely see a decrease in its net dollar retention rate, even if it doesn't lose any customers.

Finally, Net dollar retention rates can be affected by changes in the mix of customers a company has. For example, if a company acquires a new customer who has a higher churn rate than the company's average customer, that will likely impact the Net dollar retention rate.

How is Net dollar retention (NDR) calculated?

Net dollar retention is the total revenue a business generates after customer churn, divided by the MRR at the start of the month.

Example:

At the beginning of May your MRR is $12,000 and after expansions (upsells, crossells) during May it increases to $15,000. The churn for the month of May was $2,000.

This means that you end the month on $13,000. $15,000 MRR (including expansions) - $2,000 churn.

This $13,000 is divided by the original MRR of $12,000, which gives you a net revenue retention rate of 108.33%.

Why is Net dollar retention (NDR) important to measure?

Net dollar retention is important because it is a key sign as to whether your company is growing. A positive net revenue retention is a sign that you have a low churn rate and are able to achieve positive growth through upsells and expansions. If a company is losing customers, you would expect to see a negative Net dollar retention rate.

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