Section 1.1: Understanding Net Dollar Retention (NDR)

Net Dollar Retention is a pivotal metric frequently discussed in the B2B startup community. It provides a means to gauge retention in terms of revenue.

NDR reflects the revenue retained from your existing customers while also considering any expansion within that base. To illustrate, consider a company that starts with $10,000 Monthly Recurring Revenue (MRR) per customer in its first year (January cohort), achieving 100% retention and totaling $100,000 MRR from ten customers by the second year.

In a more typical scenario, the company might lose two of those ten customers in January of the second year, resulting in an 80% retention rate and an MRR of $80,000. However, if the company successfully upsells its remaining customers, increasing their MRR from $10,000 to $20,000, the total MRR could rise to $110,000. This would represent a $10,000 net gain, resulting in a remarkable 110% Net Dollar Retention.

Formally, NDR is a crucial SaaS metric that measures revenue retention from existing customers, factoring in upsells, cross-sells, and customer churn. It provides valuable insights into revenue growth and expansion within your existing clientele.

To calculate NDR, consider this:

This calculation may seem complex, but it’s best understood through practical examples!

A positive NDR signifies revenue growth from existing customers, compensating for any losses incurred due to churn. An NDR greater than 100% indicates that upsells and expansions are surpassing any revenue lost from churn, signifying strong customer engagement and satisfaction.

According to Y Combinator, early-stage B2B SaaS companies should aim for an NDR above 100%. This can be a challenging benchmark to reach. Why?

• You might be underpricing your product.
• You could be rolling out new features.
• You should be improving your sales tactics and upselling efforts.

If your NDR dips below 100%, it may indicate underlying issues like customer churn or dissatisfaction. In such cases, engaging with your customers to understand their concerns is crucial for improving your product.

Section 1.2: The Importance of Gross Margin

Gross Margin is another vital metric for evaluating the financial health of your B2B SaaS business. It represents the difference between revenue and the cost of goods sold (COGS), expressed as a percentage of revenue.

For further insights on metrics, consider the following resources:

Video Description: This video discusses six critical B2B SaaS metrics that are essential for understanding your business's performance and offers strategies for improvement.