Net Dollar Retention (NDR) tracks recurring revenue from a group of customers over time. NDR shows the net impact that expansion, contraction, and churn have on a business. When expansion is greater than the sum of contraction and churn, a business can have >100% NDR (sometimes called net negative churn), which is the gold standard for SaaS companies.
Net Dollar Retention = current ARR from customers active in a specific period ÷ ARR from the same customers in that period
There are three methods of calculating NDR:
Trailing Period: Recurring revenue from all active customers at a certain point (eg October 2023) is compared to recurring revenue from those customers 1, 3, 6, or 12 months later.
Cohorted: Customers are grouped by cohort (sign-up period). The cohort’s original revenue is compared to recurring revenue from that cohort a fixed amount of time (eg 12 months) later.
Renewal: For customers who are up for renewal, the recurring revenue of their expiring contract is compared to the recurring revenue from their new contract.
All three methods give unique insights: trailing period shows the most recent trend for the customer base as a whole, cohorted retention shows how a customer may behave at a certain age, and renewal retention is good guidance for customers who are coming up for renewal. No matter how you measure, what’s important to remember about NDR is that it does reflect power laws: for companies that have organic expansion baked into their product, or have a compelling up-sell motion, it’s possible for expansion from a few big customers to dwarf churn and contraction. This can boost NDR well above 100%, even if churn is non-trivial. The most successful SaaS companies all tend to have NDR > 100% by all metrics. It makes it much easier to grow a business if each year, even with no new sales, your business grows based on customer expansion.