It’s no secret that financial markets have taken a turn for the worse. Stocks are in bear market territory, interest rates have spiked (and will likely continue to rise), and the likelihood of a recession climbs.
For SaaS companies, success is still quite possible, but we’re entering a stretch where financial discipline will be key. Funding and new customers won’t come as easily as they once did.
With this in mind, we thought we’d take a deep dive into a KPI we often look at here at Element SaaS Finance: Net Dollar Retention.
What is Net Dollar Retention?
Net Dollar Retention (NDR) is a method of assessing the unit economics of a business. It tells you how sticky the product is and how reliant your company has become on sales and marketing spend.
Calculating NDR is easy. Here’s the formula:
(Starting revenue -contraction – churn + expansion)/ Starting revenue
For example, let’s say your beginning MRR is $1 million. Then you lose $15,000 to churned customers and$15,000 to contraction from existing customers, but see expansion revenue of $50,000 (again, from your installed base). In this case, your NDR would be 102%.
Why NDR is So Important
NDR measures the health of your current MRR by assuming you spend no additional money on sales and marketing to acquire new customers. In other words, how dependent is your business’ growth and viability on your sales and marketing budget?
We like to see a minimum NDR of 100%. That means a company we’re lending to isn’t reliant on burning cash to acquire new customers. Below 100% starts to be problematic, and by 95%, we start to get concerned.
What Does a Poor NDR Indicate?
Suppose you calculate your NDR and find out that it’s below 100%. There could be a few reasons for this:
• Customers try your product and find it’s just not working for them
• It’s a great product, but the pricing is too high
• You only have a couple of pricing tiers, and moving customers to the more expensive one is proving challenging
How to Improve Your NDR
A poor NDR isn’t set in stone. Like most things in life, improvement is possible! If you find that your NDR is below 100%, you may want to reassess:
1. Your user experience
2. The pricing of the product
3. The number of tiers available (consider expanding them)
If the pricing of the product seems sound but user experience is a challenge, here are a few items to consider to improve the user experience:
• Find ways to further cross-sell/ embed yourself into the customer's system. Get sticky.
• Incentivize upselling. Push your clients to a higher tier.
• Poll clients leaving to see if there are commonalities in customers leaving
• invest in your customer success team (they are responsible for maintaining and keeping these guys!)
Tough Times Require Efficiency
When money is plentiful, burning lots of cash may not be a big problem. But when those times end (as they seem to be right now), holding on to the customers you’ve acquired becomes paramount. As we often point out, it’s much cheaper to increase revenue from an existing customer than to acquire a new one.
As capital markets tighten, businesses will need to reduce spend. As a result, sales and marketing are often the first to be cut. That means you can’t count on spending lots of money to increase your revenue. To use a sports analogy, you must get more out of the players (customers) you have!
Looking for debt finance to grow your SaaS business? Here at Element SaaS Finance, we provide easy-to-understand term loans for companies just like yours. We don’t ask for board seats, warrants, or personal guarantees, either. Give us a shout anytime to see if we might be a match for you.