What is Net Dollar Retention (NDR)?

Net Dollar Retention (NDR) is a specific metric that tells you how your revenue from a current set of customers has changed over a period of time.

It goes beyond simple churn rates.

While churn tells you who left, NDR tells you the financial impact of those who left combined with the financial impact of those who stayed and spent more. It is the percentage of recurring revenue retained from existing customers, factoring in upgrades, downgrades, and churn.

For a startup founder, this number is a truth teller. It strips away the noise of new sales and forces you to look at the value you are providing to the people who already bought from you.

If you stopped selling today, would your revenue go up or down next year? NDR answers that question.

Calculating NDR requires you to isolate a cohort of customers from a specific starting point. You need to look at four variables over a specific period, usually a month or a year.

Here is the basic calculation:

• Starting MRR: The revenue from the cohort at the beginning of the period.
• Expansion: Revenue added from upsells or cross-sells to that group.
• Downgrades: Revenue lost because customers lowered their tier or usage.
• Churn: Revenue lost from customers leaving entirely.

You take the Starting MRR, add the Expansion, subtract the Downgrades, and subtract the Churn. Then you divide that total by the Starting MRR.

If the result is above 100 percent, your business is growing organically from within its own customer base.

It is easy to confuse Net Dollar Retention with Gross Revenue Retention (GRR), but they serve different purposes.

GRR only looks at the retained revenue from the starting cohort. It does not include expansion revenue. Because it ignores upsells, GRR can never exceed 100 percent.

GRR measures your ability to defend revenue. It shows how good you are at keeping people from leaving or paying less.

NDR measures your ability to compound revenue. It shows how good you are at proving value so that customers want to pay you more.

Investors often look at GRR to judge the stickiness of the product. They look at NDR to judge the efficiency of the business model.

In the earliest days of a startup, your NDR might be volatile. You likely do not have enough data or a standardized pricing model to make sense of the percentage.

However, once you achieve product-market fit and have a steady stream of recurring revenue, NDR becomes critical.

A high NDR implies that your Customer Acquisition Cost (CAC) pays off over a longer period. It suggests your Lifetime Value (LTV) is increasing.

If you are looking to raise capital, a rate over 100 percent is often the standard for high-growth companies. It signals that the product becomes more essential to the customer over time.

While a high percentage is generally good, it can mask underlying issues.

For example, you might have massive churn in your small business segment but massive expansion in your enterprise segment. The aggregate number might look healthy while you are bleeding out an entire customer demographic.

Founders need to ask difficult questions when reviewing this metric.

Is the expansion coming from price increases or increased usage? Is the retention heavily weighted toward a few large accounts? Are we retaining customers because they love the product or because they are locked into long contracts?

NDR provides the data, but you still have to interpret the story behind it.