Net Dollar Retention, also known as Net Revenue Retention or Net Expansion Rate, is a metric used to measure the growth and retention of revenue from existing customers over a specific period, typically on a quarterly or annual basis. This metric is particularly relevant for subscription-based businesses, Software as a Service (SaaS) companies, and other businesses with recurring revenue models.
Net Dollar Retention takes into account changes in revenue from existing customers due to expansions (upsells, cross-sells, and additional purchases) and contractions (downgrades or reductions in usage) as well as the impact of customer churn (cancellations). It provides a comprehensive view of how a company’s existing customer base is contributing to its overall revenue growth, considering not only the acquisition of new customers but also the expansion of revenue from current customers.
The formula to calculate Net Dollar Retention is as follows:
Net Dollar Retention = (Ending Revenue from Current Customers + Expansion Revenue – Contraction Revenue – Churned Revenue) / Starting Revenue from Current Customers
In simpler terms, it’s the ratio of the total revenue generated from existing customers at the end of a period to the total revenue generated from the same set of customers at the beginning of the period, accounting for expansions, contractions, and churn.
A Net Dollar Retention rate greater than 100% indicates that the company’s existing customer base has contributed more revenue at the end of the period compared to the beginning, even after accounting for lost revenue due to churn. This suggests that the company is effectively upselling or cross-selling to its customers, resulting in overall revenue growth from the existing customer base.
A Net Dollar Retention rate below 100% suggests that the company is experiencing significant churn or contraction within its existing customer base, which could be a sign of challenges with customer satisfaction, product adoption, or value delivery.
Net Dollar Retention is an important metric because it provides insights into the health of a business’s customer relationships, the effectiveness of its upselling and cross-selling strategies, and the overall customer satisfaction and loyalty. High Net Dollar Retention rates indicate strong customer relationships and a high level of customer success, while lower rates can highlight areas for improvement in customer retention and revenue expansion efforts.