Net Dollar Retention is the North Star Metric for RevOps Teams

RevOps

In a world of endless data, Net Dollar Retention is the north star metric for successful RevOps teams, providing a shared vision across functions.

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Priyaanka Arora
April 14, 2022
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Net Dollar Retention is the North Star Metric for RevOps Teams

Summary

If you were asked to name your key priority as a RevOps leader, what would it be?

Maybe you’d pick change management, or championing data-driven decision making. And those are very real, valid objectives for any organization worth its salt.

But chances are, you’re going to name cross-functional alignment and buy-in as your #1 goal. In other words, enabling siloed teams to work together on tools, targets, and data insights.

To measure your success in meeting this goal, you’re going to need a north star metric. Look no further than Net Dollar Retention (NDR).

Let’s back up and address some important questions first:

Why is it crucial to unite Sales, Marketing, and Customer Success teams?

It is so important to create a shared vision for your departments simply because this is the easiest way to meet revenue goals.

Here’s a fun fact: aligned teams generate 38% more revenue in 27% less time.

RevOps was born out of the need to formally unify systems that were already being shared, although inefficiently.

Why is shared data the way of the future?

The last decade or so has seen the rise of data. Buzzwords like "KPI" and "AI" are thrown around, and data analytics has gone from an elite career to a must-have skill in almost every function of the business.

Ask yourself: at what point does data become noise?

As a RevOps professional, it’s your responsibility not only to identify your org’s KPIs, but also to standardize them. One of the biggest challenges fast-growing companies face is data disparity between teams, which leads to limited analysis and gaps in customer insights.

There's a sea of metrics to track, but it's so easy to lose sight of why it's important to be data-driven in the first place. You are empowered when you act on your insights from data.

By focusing on metrics like NDR, you create a single source of truth for your stakeholders - simply because NDR is a reliable metric that covers multiple aspects of the business.

What is Net Dollar Retention (NDR)?

Net Dollar Retention is the percentage of revenue you retain from existing customers, including expansion revenue, downgrades, and cancellations.

Calculate NDR by adding up existing recurring revenue + expansion revenue, subtracting any downgraded or canceled revenue, and divide that by the recurring revenue at the beginning of the period.

The NDR formula, simplified

You might have heard of Net Dollar Retention referred to as Net Revenue Retention or Net Negative Churn Rate. They’re all the same metric. And they all have a really, really long formula at first glance.

Net Dollar Retention = Recurring Revenue (start of period) + Expansion Revenue (end of period) - Downgrade Revenue (end of period) - Cancellation Revenue (end of period) / Recurring Revenue (start of period) 

It’s much easier to remember the NDR formula broken down into its components:

  • Recurring revenue (RR): the total recurring revenue earned from existing customers
  • Expansion revenue: revenue generated from upsells and cross-sells
  • Downgrade revenue: the difference between initial revenue and current revenue after a customer downgrades to less expensive services, tiers, or payment plans
  • Cancellation revenue: the total amount of revenue lost when a customer cancels services

Just remember that NDR adds recurring revenue at the beginning of the period to expansion revenue during the period, less any cancel or downgrade revenue during the period. And divides this number by recurring revenue at the beginning of the period.

Here’s an example to illustrate how you would calculate NDR:

How to calculate NDR

At the beginning of the month, Sales reported $500,000 recurring revenue. During the month, your company managed to upsell and earn $20,000 in expansion revenue. However, you also had $5,000 worth of downgrades, and $10,000 of cancellation.

To calculate NDR at the end of the month, you would add $500k RR to $20k expansions, then subtract $5k downgrades and $10k cancels to get $505,000. Divide by the $500k RR you started with to get an NDR of 505k/500k = 101%.

Once you have the basics mastered, you can dive into the actual benefits of tracking NDR.

How to capture cross-functional success with NDR

When putting together key metrics for your org to depend heavily on, NDR should feature in your top 5 list. This is because NDR captures so many aspects of the business relevant to each of your stakeholders:

At the very least, NDR represents:

  • Sustainable revenue growth rate: NDR increases with retention and expansion from existing customers. You’re calculating revenue growth that is independent from customer acquisition costs.
  • The effectiveness of your upsell strategy: upsells, cross-sells, upgrades. They only come when your customers find value in their experience so far and want more.
  • A great customer success team: expansion up, churn down. That’s how to increase NDR and that’s something you achieve only with the very best crew nurturing your customer success journey.
  • Product-market fit: high revenue growth is great, but high NDR on an upwards trend? That’s literally your customers loving your product and expressing that love with (more) money.
  • A better approach to churn: you’re still tracking churn with NDR. Except, you’re viewing churn in the context of your bottom line. Powerful stuff.

Reread this list through the lens of the players it would impact, and you'd arrive at Sales, Marketing, and Customer Success. Seeing a pattern?

Reads like cross-functional alignment through and through!

The benefits of tracking NDR as a high-performing RevOps team

One of the key benefits of tracking NDR is the stability and reliability of the calculation. When you’re on a mission to champion a shared vision for your company, a great place to start is with a metric everyone can agree on.

NDR is the perfect north star metric for your team because you can cover retention, expansion, cost savings, and product-market fit with a single number.

Read through a few benefits of NDR as your team’s north star metric:

NDR is a good replacement for churn

You should always be able to detect early warning signs of declining health for a variety of factors. However, those signs can be somewhat diluted by metrics like churn rate, which is a lagging indicator measuring damage that has already taken place.

Here’s an example to reinforce this concept:

Take a hypothetical situation where your MRR is $100,000, your churn rate is about 7% and your NDR is 113%.

If you track MRR churn as your primary KPI, all you see is the $7k lost month-over-month.

But with NDR, you know that you’re actually bringing in $20k expansion revenue to soften the impact of that $7k churn.

On the flip side, low churn rates can mask poor growth rates unless you track a metric like NDR as well.

When you share these numbers with your stakeholders, they take away a couple action items: reducing churn but also bringing more of the value prop that drove expansion and retention in the first place.

NDR is a solution to the perils of high CAC

Did you know that customer acquisition costs are the highest they’ve been in 6 years?

Customer acquisition cost has increased significantly

The reasons are plenty; market saturation, availability of information, abundance of venture dollars to fund sales and marketing, and the high cost of standing out.

Given this trend of high CAC that is unlikely to decline in the near or mid future, it’s no longer sustainable to completely rely on marketing- or sales-led growth models, especially in SaaS.

Your product needs to drive your growth. Period. Your team can be the driving force that inspires the adoption of product-led growth for your business.

And NDR can spark the conversation that refreshes your company’s approach to traditional sales and marketing.

What is a good benchmark for NDR?

The general consensus for a good NDR benchmark is at least 100%. High-growth companies score around 120% NDR, while a realistic median NDR for most companies hovers around 100% to 105%.

Of course, you’re going to see a lot of variance, mainly depending on your customer type and ARR scale. Here are key learnings on NDR benchmarks from OpenView’s 2020 Expansion SaaS benchmark report:

  • Companies generating more than $50 million ARR have a median NDR of 105%
  • Companies on the lower end of the scale at less than $1 million ARR have a 99% median NDR
  • Median NDR increases with the round of funding from 100% at Seed round, to 105% at Series D and beyond
  • Companies with mid-market and enterprise target customers see the least variance in median NDR numbers
  • Overall: 42% of expansion SaaS companies report a median NDR between 100% and 115%, while top performers see a median NDR of 125% and above

The best of the best NDR benchmarks come from extremely high-growth SaaS firms such as Snowflake, with a whopping 158% NDR.

Limitations of tracking the NDR metric

While NDR is a powerful metric to add to your repertoire, there are a few factors that can be easy to overlook. As you guide your company along on the path to measure success with NDR, keep the following dangers of tracking NDR in mind:

  • NDR should never be tracked in isolation. As with any metric, there are ways to dilute numbers, such as by covering up churn with expansion, or through a large number of smaller contracts. Track NDR along with net new revenue to get the complete picture.
  • Beware of NDR as a lagging indicator. This applies in both optimistic and pessimistic scenarios. When measuring team performance, make sure to add a couple leading indicators such as customer satisfaction scores, or pipeline volume.
  • Keep in mind the costs and limitations of expansion revenue. Analyze the components of your expansions: expansion from increased product penetration has an upper limit to growth, and cross-sales increases your costs, while volume pricing strikes a balance between growth capacity and resource allocation costs.

NDR finds what works and helps you amplify that success

The NDR metric, with all of its flaws and limitations, can help you isolate successful cohorts and share those learnings with the wider business.

That's a sure fire way to act as the sole voice of reason the rest of the company can gravitate towards.

Careful selection of key metrics such as NDR can set you apart from competitors by backing your growth strategy with sustainable measures of success.

And you don’t have to do it on your own: say goodbye to the nightmare of spreadsheets and explore the Pigment business planning platform to simplify your reporting, cross-functional collaboration, and cohort analyses.

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