Improving Net Dollar Retention

In a previous article, my partner Alex explained the importance of a strong net revenue retention rate and its correlation to a public company’s valuation. If you haven’t read that - or need convincing on why you should care about this metric - check it out. 

In this article, we will explore some of the strategies and tactics to measure and improve your Net Dollar Retention Rate. Before we jump in, it is important to note that Alex’s article focused on Net Revenue Retention Rate of public companies. In analysis of public companies, we use revenue to calculate this. While this is great for comps, revenue is a trailing metric. For the purposes of this article (and the betterment of your company), we will be focusing on “dollars” or bookings (defined as the “starting date” or “ending date” of a contract with a customer). Bookings are forward looking and align more closely with day-to-day operations of a Go-To-Market Team. 

Ok, now that we have this public service announcement out of the way, let’s dive in! 

Measuring net dollar retention for your business…

Here is the calculation of net dollar retention:

As you can see from the equation above, net dollar retention allows you to compare your customer base on a dollar basis over time. If you take time to think about the metric in detail, you probably noticed some interesting things:

  • You can calculate this metric over any time period

  • The metric is not impacted by newly added customers, just those you already had in a given period

  • The metric is highly dependent on retention/churn

  • The metric is highly dependent on expansion/up-sell

Considering these variables, there are a few different ways that you can calculate this critical metric for your business. For most organizations, it makes sense to understand your retention rate from different perspectives so you can see the whole picture, but not change the underlying definitions which are critical to being consistent. What’s important is to choose a calculation and definition for the underlying components that are a true reflection of the efficiency of your business. Here are some of the components to consider and a few tips as you think about it for your company:

  1. Expansion vs. Net New: 

    • Is it clear what is considered bookings from a Net New Customer vs. Expansion?

    • Have you considered horizontal (new business units) vs. vertical (more seats, volume, etc.) and how you track them?

  2. Logo Churn vs. Downgrade:

    • Do you track downgrades vs. a complete loss of a customer? Analysis of where dollar churn is coming from and how it can be mitigated is key.

  3. Segments & Product Lines:

    • Do you have a self-serve business that act completely differently from your contracted customers?

    • Do you have different product lines that should be considered? How do you think about attach rates between them?

Oftentimes, I see founders choosing the calculation that makes their company look best. This can be helpful for raising money & looking good in the short term, but it is a surefire way to miss opportunities to really build a great business in the here and now. Take time to establish these definitions internally and make sure they are reflected in your reporting and systems. Don’t just take definitions off the shelf without questioning what reflects efficiency for your company.

Pro-Tip: If you aren’t sure on a specific definition for your business, remember this. Net Dollar Retention is an efficiency metric. If you are having to work really hard and deploy tons of additional resources for the expansion of your existing customer base, you should generally have a lower Net Dollar Retention Rate. A friend of mine that previously worked at Salesforce (who has a great Net Dollar Retention Rate) told me of a story that I always think about. At one of their annual sales meetings, their CTO came in and said “Your job is to land new accounts. If we had to lay off all of our salespeople tomorrow, the existing customer base will still grow ~40% annually through natural expansion.” That’s efficient. 

Breaking it down

At the end of the day, net dollar retention is improved at the operational level by improving two main parts of your business:

  • Decrease Churn 

  • Increase Expansion 

Here are some best practices for decreasing churn:

  • Ensure that customer on-boarding is a tight and smooth process that delivers value to customers

  • Score customers against potential to expand and map customer accounts w/ resources to ensure they receive the right experience

  • Capture churn reasons and have an “exit-interview” process for key accounts that churn

  • Implement Net Retention Forecasting & Key Account Reviews

  • Set goals to ensure the team is focused on this as a key metric

Depending on the nature of your business and size of customer account, you will most likely focus on a hybrid of “automated/low-touch” and “white glove/high-touch” solutions for each of these initiatives. We will write a more detailed article about each of these activities in the near future.

As for the other side of the coin, here are some best practices for increasing expansion:

  • Review your pricing and packaging to ensure expansion opportunities exist

  • Ensure that sales is contracting new customers appropriately...mind the consumption gap!

  • Assign owners in the business for on-boarding, adoption, retention, renewal and up-sell motions

  • Ensure product strategy aligns to expansion paths that are product-led vs. human-led

  • Set goals to ensure the team is focused on this as a key metric

Hopefully you are already familiar with some of these concepts and you are making strides to improve where possible. We will be writing more about them in future articles and if you have any questions in the meantime, feel free to reach out in the meantime.