Perspectives

The Growth of NDR as a measure of Enterprise SaaS performance

Organizations with subscription pricing can take several steps to drive sustainable NDR growth

As enterprise SaaS companies focus on retention and expansion strategies, a new metric is coming into view: net dollar retention (NDR). Part one of our series on customer value explores the emerging prominence of NDR in growth and valuation, how it reflects company health, and ways organizations can scale it.

Driving sustainable, repeatable growth in enterprise SaaS

Over the past decade, enterprise SaaS companies—and those trying to showcase growing recurring revenue—have considered annual recurring revenue (ARR) as the primary metric to measure growth and health. In general, three levers drive ARR: customer acquisition, retention of existing customers, and expansion of existing customers (via cross-sell or upsell). For a long time, companies prioritized acquisition as the main driver of growth, but increasingly, companies have begun to focus on retention and expansion to sustain top-line growth and bolster the bottom line.

As the focus on retention and expansion strategies grows, companies are expanding their metrics toolkit to include a new metric favored among investors and operators alike: net dollar retention (NDR). This article discusses what NDR—also referred to as net expansion rate or dollar-based net revenue retention—indicates about a company’s health, why it is being used as an important metric by companies and investors to measure growth, and what steps organizations can take to scale NDR.

Driving sustainable and repeatable growth in enterprise SaaS

The rise of NDR as a key growth metric in enterprise SaaS

Traditionally, enterprise SaaS companies tracked metrics, such as customer acquisition cost (CAC), customer lifetime value, churn, and net promoter score (NPS) to monitor company growth and health. While these metrics are still relevant today, the shift toward retention and expansion-driven growth has pushed companies to adopt NDR as an additional—if not primary—metric.

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NDR measures growth across a company’s captive revenue base, or ARR, accounting for changes in customer upgrades, downgrades, and churn. An NDR greater than 100% indicates that growth from the existing customer base offsets any losses—downgrades or churn.

Revenue from captive customers

 

NDR

Year 0

Year 1

Year 2

Year 3

Company A

100%

$100

$100

$100

$100

Company B

110%

$100

$110

$121

$133

Company C

120%

$100

$120

$144

$173

If acquisition remains equal, a slight uptick in NDR implies a significantly higher revenue growth. For example, with an NDR of 120%, Company C will see 1.7x revenue growth in three years, compared to Company B, which will see only 1.3x revenue growth over the same period—a 30% increase.

NDR is a leading indicator of, and positively correlated with, valuation. High NDR reveals that customers are continuously deriving value from a product, indicating a strong potential to cross-sell new products, expand share of wallet through upsell (e.g., users, data ingested, licenses, service tiers), and generate additional references.

Investors, too, have begun to recognize NDR as an essential indicator of business health and are now using it in their valuation toolkit. The companies include those that are both the largest B2B software companies by market cap and report NDR regularly. Today, a 10% increase in retention can increase valuation by up to 30%. In fact, Twilio, which has consistently reported NDR ranging from 130%–150% since 2016, saw a 5% decline in its stock price when NDR came in lower than expected, even though it beat expectations on revenue growth.

At each stage, every function that engages the customer—typically product, sales, marketing, partners, and CS—must work collaboratively to proactively orchestrate customer outcomes and deliver incremental value. The integrated loop consists of four stages: Value Strategy, which includes product strategy and design; Value Communications to price, package, position, and market; Value Planning to architect and adopt the right solution for their needs; and Value Realization to maximize value, including through use case expansion.

Maximizing customer value—and by extension, creating opportunities to drive NDR—requires a coordinated effort across functions and teams, built on a solid foundation of data governance, process scalability, and role clarity. However, achieving NDR truly takes a village with active participation not only across customer-facing functions, but also product, services, technology, and operations teams. This “village” requires a leader (different from a singular owner) to develop a unified customer vision and orchestrate across the various functions.

Delivering NDR via Intergrated Customer Outcomes

Over the past few years, enterprise SaaS companies have made significant investments in helping customers realize value across their usage journey. However, these touchpoints are often infrequent and predefined, such as the initial purchase, the point of renewal, or when onboarding a new user. Today, companies are starting to infuse customer value throughout the journey and often before the customer purchases. This shift is driven by a need to avoid churn, re-earn a customer’s share of wallet, and most importantly, “delighting” the customer.

This focus—or obsession—with customer satisfaction and achieving customer outcomes has, in turn, created greater demand for customer success (CS). Several companies—some even outside traditional enterprise SaaS—have set up broad-ranging CS capabilities that span advisory, onboarding, implementation, training, certification, and support to drive customer outcomes and, as a result, NDR. However, it is only the first step in the process. Maximizing customer value—and by extension, creating opportunities to drive NDR—requires a coordinated effort across functions and teams, built on a solid foundation of data governance, process scalability, and role clarity.
 

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