The Beginner’s Guide to Net Dollar Retention & Gross Dollar Retention
As the majority of SaaS businesses rely on subscriptions, the retention rate is a critical metric to measure. It allows SaaS companies to know what should be optimized, changed, or scaled.
Net Dollar Retention and Gross Dollar Retention are important metrics that you should track if you want to retain customers in the long term and have a successful SaaS business!
What is Net Dollar Retention?
Net Dollar Retention is a metric commonly used to make year-over-year performance evaluations. Net revenue retention is another name people use to describe this metric.
The net dollar retention estimates the percentage of recurring income from current clients that are retained over time. Thus, this metric is closely tied to customer retention.
Net Dollar Retention compares a company’s revenue from current clients in a given year to the prior year’s revenue. However, it does not take into account revenue from new clients signed up this year. So, basically, net dollar retention is the revenue that comes from customers that you have retained from the previous year.
A high Net Dollar Retention is a good indicator for a growth-oriented organization, as it’s tough to achieve significant percentage growth year over year when the churn rate is high.
How to Calculate Net Dollar Retention?
Calculating Net Dollar Retention is fairly easy with its formula. I will give the formula you can use and an explanation of each variant.
Now that you know what the formula is, I will proceed to explain what upgrades, downgrades, and churn are.
Upgrades
This term refers to the customers that upgraded their subscription. Suppose you have two pricing packages:
Package A for 30 dollars/month
Package B for 50 dollars/month
Any customers that go from Package A to Package B will be counted as an upgrade. If you have a lot of members upgrading, it increases your chances of having a high net dollar retention.
Downgrades
As implied by its name, downgrades are the exact opposite of upgrades. If a customer chooses to switch to a lower priced package, this will be considered as a downgrade as far as the net dollar retention is concerned.
You can easily see from the formula that increased downgrades decrease the net dollar retention. You should keep these customers at a minimum to have a high net dollar retention.
Churn
The churn rate is the percentage of customers who have ended their subscriptions. Since churn is one of the biggest challenges in front of customer retention, it heavily affects your net dollar retention as well. Keeping your churn rate at a minimum is a must and using churn optimization tools like HockeyStack can make this much easier.
Important Things To Know About The Formula
You can also increase your net dollar retention by increasing the number of new customers that use your service as these customers also go under the upgrades section of the formula. An increase in the service price can also lead to higher net dollar retention.
Why is Net Dollar Retention Important?
Net Dollar Retention explains your growth rate with your current customers, and according to Dave Kellogg, EIR at Balderton Capital, the Net Dollar Retention is becoming the single most important metric for SaaS companies. This is because it’s a good indicator of how satisfied your customers are with your service. If your customers are happy with the service, they will upgrade it or keep using your service. As a result, the number of downgrades or churns will also keep decreasing, leaving you with a good net dollar retention.
Also, a low Net Dollar Retention can help you see the problem of your business. A low Net Dollar Retention might have a few different reasons, such as:
- Wrong customer persona
- Wrong feature-set
- Difficult onboarding
- False promises in marketing campaigns
If you have a low Net Dollar Retention, then you can create a churn survey to understand why your customers end their subscriptions so that you can adjust your marketing and product strategy to increase your retention rate.
If your marketing is the problem, you can change your inbound marketing strategies, SEO strategy, or PPC campaign structure.
If onboarding is the problem, which means your customers don’t get to the a-ha moment easily, then you can work on your onboarding flow and onboarding emails. I’ve talked more about these possible improvements below, but you can check out these email examples now to get inspired.
What is a good Net Dollar Retention Rate?
Existing customers generate more income when the net dollar retention is greater than 100%. It implies that your business may expand without adding new clients, which is also known as a negative churn rate.
Any net dollar retention below 100 means that you should up your game by working on your customer marketing strategies. At near 110 you are in the median group of SaaS companies. And if you have a score above 120, it means you nailed it!
How to increase Net Dollar Retention Rate?
There are a few different things that you can do to increase the net dollar retention rate. Let’s take a look at some ways in which net dollar retention rate can be increased:
- Fix UX problems based on feedback: your customers’ reasons to switch to competitors can be eliminated, but only if you know what their problems are. There’ll be trends in their answers, which will give you an idea about where your focus should go while optimizing your products. You can survey users both while they’re using your product and after they have stopped doing business with you.
- Guide your customers: sometimes people just don’t get how to use your product, and it’s your job to explain it to them. In fact, more than 90% of customers think that the companies they’re buying from could do a better job in terms of onboarding new customers. Having a good onboarding flow can help customers see your products’ most useful features and hook them to your products.
- Know your customer persona: maybe the customers that are cancelling were not a part of your ideal customer profile in the first place. Ensure that your marketing team is finding high-value customers that are were actively looking for your product.
- Have excellent customer service: this means that you should have a good email marketing strategy that consists of personalized emails , being quick and accessible, and giving special treatment to customers from the very start.
What is Gross Dollar Retention?
Gross dollar retention is an essential but frequently overlooked metric in SaaS. Gross dollar retention is the percentage of a customer’s revenue that has remained with you after a year.
The Gross Dollar Retention rate, also known as Gross Revenue Retention is similar to the Net Dollar Retention in that it analyzes changes in recurring revenue induced by movements in current customer revenue. It takes downgrades and churns into the calculation, but it does not consider any expansion of the revenue.
How to Calculate Gross Dollar Retention?
You can use this formula to calculate your SaaS company’s Gross Dollar Retention rate:
You can check the meanings of these terms above under the net dollar retention calculation part since both the Gross Dollar Retention and Net Dollar Retention rates are calculated in more or less similar ways.
What is the difference between Gross Dollar Retention and Net Dollar Retention?
Gross dollar retention is all about calculating retention without anticipating growth from upgrades. So, gross revenue retention essentially informs you how steady your revenue is.
This allows you to see how much churn and downgrades are costing you. If you identify that they’re resulting in a substantial revenue loss, you may take proactive measures to prevent downgrades, such as interacting with customers at risk of churn or developing a customer success adoption strategy.
Net revenue allows you to concentrate on how rapidly your revenue from upgrades is increasing. This might help you determine how effective your cross-sell and upsell techniques are.
If your calculations show that you’re falling short in these areas, you may take actions to improve adoption and upgrade rates, such as designing a client growth plan. So we can say that gross dollar retention is an indicator for the longer term. That said, it’s clear that you should follow both of these metrics to maximize your success!
FAQ
What is the average Net Dollar Retention?
Public SaaS firms have a net dollar retention rate of 115 percent on average. For enterprise SaaS firms, anything less than 100 percent is a red flag. In that case, you should start searching for the problem! Keeping your score above 120 means that you are doing everything right. If you have a higher score, keep up what you are doing!
What is a good Net Dollar Retention?
As mentioned in the previous question, the average net dollar retention is 115 percent. In general, keeping your score at least above 100 percent is a must. Anything below 100 percent means trouble! 120 percent and above is a really good net dollar retention.
How is Gross Dollar Retention different from Net Dollar Retention?
Gross Dollar Retention does not take upgrades into account. This is the only difference between gross dollar retention and net dollar retention. Without the expansions taken into account, net dollar retention reflects your company’s ability to keep customers. Both have different use cases and are important for your SaaS company.
What is the rule of 40 SaaS?
According to the Rule of 40, a company’s revenue growth rate added to profit margin should always be equal to or higher than 40% at scale. The Rule of 40 has become a concept for articulating the balance of these two components in SaaS management teams, who are frequently striving for either quick expansion or higher profitability.
