Expanding and retaining your existing customer base is a “must have and must do” aspect to growing your MSP. And Net Dollar Retention (NDR), also known as Net Revenue Retention (NRR), is a critical metric that measures the percentage of recurring revenue retained from your existing customer base over a specific period, typically a month or a year. It goes beyond just looking at customer leakage (i.e., churn) by also factoring in revenue changes from upgrades, downgrades, and cross-sells.
Why Net Dollar Retention Matters
NDR provides valuable insight into the health and growth trajectory of the recurring revenue portion of your MSP business and tells you how much the revenue from your existing customers has grown (or shrunk) over time. Specifically, NDR:
- Indicates Customer Value and Satisfaction: A high NDR suggests that customers are finding value in your product or service and are willing to spend more over time.
- Reflects Growth Efficiency: Growing revenue from existing customers is often more cost-effective than acquiring new customers. A strong NDR contributes to efficient and sustainable growth.
- Signals Upsell and Cross-sell Effectiveness: It highlights how well your strategies for increasing revenue from current customers are working.
- Attracts Investors: Investors often look at NDR as a key indicator of an MSP or SaaS company’s health and growth potential. An NDR above 100% is generally seen as positive.
- Beginning Revenue: The total recurring revenue from your existing customers at the start of the measurement period. This could be Monthly Recurring Revenue (MRR) or Annual Recurring Revenue (ARR).
- Expansion Revenue: The additional revenue generated from existing customers through upgrades, cross-sells, or add-ons during the period.
- Contraction Revenue: The revenue lost from existing customers due to downgrades or reduced usage during the period.
- Churned Revenue: The revenue lost from customers who canceled their contracts/subscriptions or stopped using your service during the period.
For Example:
Let’s say a company starts the month with $100,000 in MRR from its existing customers. During the month, these customers generate an additional $15,000 in upsells, $3,000 in downgrades, and $7,000 in churn.
An NDR of 105% means that despite some customers downgrading or churning, the revenue generated from the existing customer base grew by 5% during the month due to successful upsells.
What is a good Net Dollar Retention Rate?
While benchmarks can vary by industry and company stage, here are some general guidelines:
- Below 100%: Indicates that you are losing more revenue from churn and downgrades than you are gaining from expansions. Naturally, this is a cause for concern.
- 100%: Suggests that your retained revenue is offsetting any losses, but you are not experiencing net growth from your existing customers.
- 100% – 120%: Considered a good range, indicating healthy customer retention and some revenue growth from expansions.
- Above 120%: Generally considered excellent, signifying strong customer loyalty and effective upselling and cross-selling strategies driving significant revenue growth from your existing base.
Net Dollar Retention provides a valuable insight into the health and growth trajectory of your MSP’s recurring revenue model. By understanding and actively working to improve this metric, you can achieve more sustainable growth and increase valuation.
Is your organization ready to optimize its revenue strategy? Let’s talk.
For additional McMann & Ransford insights specific to the MSP market, please visit Managed Services Providers | McMann & Ransford – Management Consulting.