How to increase Net Dollar Retention (NDR) using automation

Team meeting

Net dollar retention (NDR) is one of SaaS companies’ most critical revenue-based metrics.  It is material because NDR is the KPI that tells you the percentage of revenue you either gained or lost from your existing customer base over a given period. This lets you understand and optimize the success of the product from your most profitable cohort:  current customers.

As you know, “closing the sale” isn’t a one-time event for recurring revenue companies. You have to keep closing the loop repeatedly by ensuring customer satisfaction and hopefully through abundant upsells. Your NDR helps you stay aware of how your company is performing in this phase of its relationship with customers.

How to calculate NDR

Your annual NDR can be calculated by doing the following. Begin with your annual recurring revenue (ARR) and then add your new yearly subscribers and upgrades while subtracting your churn and downgrade numbers for the year. Once you have that figure, divide it by your starting ARR. The resulting percentage will be your annual NDR.

Of course, if you’d rather not do the long-form math on that, particularly with constant contract amendments from upsells and downsells, modern cloud accounting software can handle revenue calculations with pinpoint accuracy and lightning speed.

Now that you know exactly what NDR is, let’s explore how finance and accounting can help you increase it substantially.

How to identify prime upsell opportunities

As we alluded to above, SaaS CFOs should always keep tabs on how ongoing customer relationships are working out. Luckily, your customers will often tell you exactly how they feel without you even asking.

When it comes to confirming the status of customer relationships, your sub-MRR metrics will tell you everything you need to know. Your monthly recurring revenue (MRR) breaks down into various subcomponents that help you analyze positive or negative movements in your monthly revenue.

The following metrics (expressed as percentages) will help you identify your most promising upsell opportunities since they point to your happiest customers and your most popular products:

  • Upgrade MRR: Your upgrade MRR tells you how much additional monthly revenue you gained from customers upgrading their subscription tier. To find this figure, add your additional revenue from upgrades to your starting MRR and divide the result by your original MRR.
  • Cross-sell MRR: Your cross-sell MRR shows the revenue you gained from cross-selling products over a given month. To find this number, follow the same process we described above but insert your monthly cross-sell numbers instead.

These figures help you identify your top-performing products and your happiest customers. Once you have that data, you can formulate specific and highly effective strategies to increase profits.

Spotting and correcting usage drops

Managing your ongoing customer relationships is a lot like performing a balancing act: things could swing one of two ways, or they could drop off entirely. Your goal regarding usage drops should be to gently tilt your users back in the opposite direction if you can.

Before you can correct usage drops, you have to spot them. The following two metrics will help you do that easily and effectively:

  • Downgrade MRR: As the name implies, your downgrade MRR is the percentage of monthly revenue you lost to customer downgrades. This loss tends to be simpler to correct than the following kind.
  • Churn MRR: Your churn MRR tells you the amount of monthly revenue you lost to churn. As we’ve covered elsewhere, the two types of churn are voluntary and involuntary.

It’s helpful to decide on course correction strategies ahead of time when dealing with these metrics. For example, sending an email offering a free month of product use might help you recapture revenue from recently unsubscribed customers.

The gift that keeps on giving

Knowing all this is helpful, but it’s insufficient if you want to get ahead in today’s highly competitive SaaS marketplace. Automation is the missing link that can help you transform these principles from abstract business topics into applied profit drivers in your company.

A modern, cloud-based accounting software suite will enable your department to:

  • Instantly spot and act on negative indicators: Inter-departmental access to data means you can interface with your marketing department for real-time correction strategies when individuals churn or downgrade.
  • Immensely increase efficiency: The organic, centralized way that cloud-based software handles data means that you’ll never need to send another email across departments for data gathering. Everything you need will be right at your fingertips.
  • Access accurate multi-factor forecasting: Automation makes forecasting as simple as plugging in your data. The software does the rest for you. Sage Intacct allows you to make forecasts based on complex assumptions and data points for pinpoint accuracy when it matters most.

Especially when SaaS companies are navigating the market downturn, automation can be a make-or-break factor in a SaaS company’s success.

Automate your way to a higher NDR

It’s true that automation can help you achieve a higher NDR through direct means such as negative indicator strategizing and others. But just as importantly, it will enable your entire department to work together in a more organic, flowing, and optimized way.

Learn more about how automation can help your SaaS company stand apart and boost your profits.