What's Net Dollar Retention & Why's it Important?

Businesses use a lot of different metrics to track business growth. To understand growth trajectory, a business might look at customer churn rate, monthly recurring revenue or any number of similar metrics. Every metric has value in different circumstances. However, in many cases, it all comes down to your business’s bottom line. Net dollar retention is one of the best metrics a business can use to track revenue growth, which can provide insight into related areas of your business, such as customer retention.

“Net retention” is a vague term that does not refer to a specific metric. Retention could relate to several different factors, including customer retention and revenue retention. However, retention metrics like customer tension and revenue retention are usually related.

Net dollar retention (sometimes called “net retention rate”) is one specific type of retention metric. It’s sometimes confused with gross revenue retention rate, which is a very similar metric. In this article, we’ll explain the difference between these two metrics, describe how to measure them, break down why they’re important and leave you with a few ways to improve them.

What's Net Dollar Retention?

Net dollar retention is a metric that measures the percentage of revenue that a business retains over a given period of time, taking into account all changes in recurring revenue during the time period. Net dollar retention is frequently used by SaaS companies because it’s a good metric for measuring fluctuations in subscription-based recurring revenue over time.

How to Calculate Net Dollar Retention Rate

Next, let’s examine how to calculate net dollar retention. Before you can calculate your net dollar retention rate, you’ll need to have a few other metrics at the ready:

• Starting monthly recurring revenue (MRR)
• MRR gained from upgrades
• MRR lost to downgrades
• MRR lost to churn

Once you have these four metrics, you can plug them into the net dollar retention formula:

[(starting MRR + upgrades MRR – downgrades MRR – churn MR) / starting MRR] x 100 = net dollar retention rate (as a percentage)

Let’s look at an example. Say your business has an MRR of $8,000 at the beginning of the time period you’re measuring. During this time period, your business gains $5,000 in recurring upgrade revenue and loses $3,000 and $1,000 of recurring revenue due to downgrades and churn. In this scenario, your calculation would look like this:

[($8,000 + $6,000 – $3,000 – $1,000) / $8,000] x 100 = 125% net dollar retention.

Calculating your business’s net dollar retention rate accurately is foundational to all your net dollar retention analysis.

What's Gross Revenue Retention?

Gross revenue retention is very similar to net revenue retention. So what’s gross revenue retention? Gross revenue retention is the amount of recurring revenue a business retains over a specific period of time without accounting for recurring revenue from upgrades.

How to Calculate Gross Dollar Retention

The gross dollar retention formula is very similar to the net dollar retention formula, with a couple of important changes. First, the gross dollar retention formula does not include upgrades revenue. Second, the gross dollar retention formula is calculated using annual recurring revenue (ARR), whereas net dollar retention can be calculated using either MRR or ARR, depending on your needs. 

This is how to calculate gross dollar retention:

[(starting ARR – downgrades MRR – churn MRR) / starting ARR] x 100 = gross dollar retention rate (as a percentage)

Gross Dollar Retention vs. Net Dollar Retention

As mentioned previously, net dollar retention and gross dollar retention are very similar metrics. The question of gross dollar retention vs. net dollar retention may easily confuse people who are hearing about the terms for the first time because they appear almost identical at first. However, we can boil down the most important differences between these two metrics to two main points:

1. Net dollar retention accounts for monthly recurring revenue gained from upgrades, while gross revenue retention does not account for upgrades whatsoever.
2. To calculate net dollar retention, you can use either your business’s starting MRR or ARR, depending on which one is the more valuable number for your specific purposes. On the other hand, gross revenue retention is always calculated using ARR, not MRR.

In more straightforward terms, net dollar retention tells you how much of your business’s ARR or MRR you’ve retained over a given period of time, taking all influences into account. Gross revenue retention tells you how much of your business’s ARR you’ve retained over a given period of time without considering upgrades.

Why Are Net Dollar Retention and Gross Revenue Retention Important for SaaS Companies?

When it comes to the importance of net revenue retention and gross dollar retention, the two subjects are really one and the same. Both of these metrics are critical for helping you figure out what kind of growth path your business is on and, ultimately, whether or not you’ll be in business moving forward. The importance of NRR and GRR is especially heightened for SaaS companies.

SaaS businesses are built around the idea of attracting repeat business from customers. If every customer signs up for a software subscription for one month and then leaves, it would be far too expensive to maintain a customer base. SaaS businesses need to retain the majority of customers for multiple months and, hopefully, years in order to develop a steady source of monthly recurring revenue.

Measuring monthly or quarterly net dollar retention is essential for giving SaaS businesses an idea of whether or not that source of monthly recurring revenue is growing. The most successful businesses strive for net dollar retention rates well over 100%, indicating that they are not only retaining customers but increasing the amount of revenue that current customers are generating. Note that a gross revenue retention rate greater than 100% is impossible since GRR does not take upgrade revenue into account. A perfect GRR rate of 100% means that no customers churned or downgraded during the period of time in question.

Net Dollar Retention Benchmark

One of the most important net dollar retention benchmarks is the 100% point. A net dollar retention rate of greater than 100% means your business is generating increasing amounts of revenue from existing customers and, therefore, could keep growing even if you don’t sign any new customers. A net dollar retention rate of lower than 100% means you are steadily losing revenue from downgrades and churn, meaning your company cannot survive long-term without attracting new customers. 

Clearly, it’s ideal to keep your business’s net dollar retention rate above 100%. Some of the most successful SaaS companies have net dollar retention rates of 120% or greater. 

How SaaS Companies Can Improve Their Net Dollar Retention in 2023

It’s one thing to understand why net dollar retention is important and how to calculate it, but how do you improve net dollar retention? Here are a few of the best ways for SaaS companies to improve net dollar retention in 2023:

1. Improve the Onboarding Experience

One way to improve net dollar retention percentage is by improving your organization’s onboarding process. Onboarding is a critical opportunity to make a great first impression on the customer, so it’s very important for the onboarding process to be a positive experience. A poor onboarding experience can lead to higher customer churn, which directly impacts net revenue retention.

2. Drive Product Adoption

Increasing product usage is one of the best ways to improve net revenue retention. By investing in tactics to boost product adoption, SaaS companies can potentially increase net dollar retention and reduce churn. There are quite a few different ways to improve product adoption, but one of the most effective methods is customer education. You can use a learning management system like Northpass to give customers access to practical product knowledge that can help them get more out of their products and encourage more frequent engagement.

3. Source Feedback from Customers

If your business is struggling to retain customers, it’s vital to understand why. By gathering feedback from customers, you can identify the problems with your product or customer experience that are causing customers to churn or downgrade. You can also use feedback to determine what kinds of features or improvements customers might be willing to pay for in the future. 

4. Empower Support Reps & CSMs

Net dollar retention is heavily influenced by customer churn rate. One of the best ways to reduce your business’s churn rate is to improve customer support to prevent or solve issues before they escalate to churn. Implementing a learning management system can provide support reps and CSMs with the necessary resources for effectively supporting customers.

5. Look for Value-based Upsell Opportunities

One of the keys to improving net revenue retention is finding ways to increase recurring upsell revenue. Understanding each customer’s needs and focusing on delivering them maximum value can help uncover the most promising upsell opportunities. While it’s important to keep churn and downgrades to an absolute minimum, you can only ever achieve a 100% net dollar retention rate by eliminating churn and downgrades. Improving upsells is how you generate growth among your existing customer base.