Net Dollar Retention (NDR)

Net Dollar Retention (NDR) (also known as Net Revenue Retention or NRR) is a crucial metric, especially for SaaS (Software-as-a-Service) and other subscription-based businesses. Think of it as a health report for a company's existing customer base. It measures the percentage of recurring revenue retained from a specific group of customers over a period (usually a year), after accounting for both growth (upsells, cross-sells) and shrinkage (cancellations, downgrades). An NDR of 100% means the revenue from existing customers has remained stable. An NDR above 100% is the holy grail; it signifies that the growth from current customers (expansion) is more than enough to offset the revenue lost from customers who leave (churn). This tells an investor that the company has a “sticky” product that customers not only keep using but are willing to spend more on over time. It’s a powerful signal of customer satisfaction and a company’s long-term growth potential, independent of its ability to acquire new customers.

For disciples of value investing, NDR isn't just another piece of jargon; it's a quantitative glimpse into a company's qualitative strength, namely its economic moat. A business that consistently posts a high NDR is demonstrating, with hard numbers, that it possesses formidable competitive advantages.

• High Switching Costs: When customers expand their use of a product, they integrate it more deeply into their daily operations. This makes it increasingly difficult, costly, and disruptive to switch to a competitor. A high NDR is often a direct reflection of high switching costs.
• Product Superiority and Pricing Power: Customers don't spend more money on a mediocre product. A strong NDR suggests the company offers a superior solution that provides so much value that customers are happy to pay more for additional features or capacity. This is a clear indicator of pricing power.
• Capital-Efficient Growth: Acquiring a new customer is expensive. Growing revenue from an existing, happy customer is far cheaper. Companies with high NDR can grow efficiently and predictably, which leads to better profitability and a business that can compound its value for shareholders over the long haul.

While the concept is powerful, the math behind it is refreshingly simple. It shows you the change in revenue from the same group of customers over a set period.

The core idea is to compare a cohort's revenue at the beginning of a period to that same cohort's revenue at the end. Formula: NDR = (Starting Recurring Revenue + Expansion - Churn & Downgrades) / Starting Recurring Revenue x 100

• Starting Recurring Revenue: The Monthly Recurring Revenue (MRR) or Annual Recurring Revenue (ARR) from your customer cohort at the start of the period (e.g., January 1st).
• Expansion: Additional recurring revenue generated from that same cohort through upsells (upgrading to a more expensive plan) or cross-sells (buying additional products).
• Churn & Downgrades: Lost recurring revenue from that cohort due to customers canceling their subscriptions (churn) or moving to a cheaper plan (downgrades).

Let's imagine a company, “StickySoftware Inc.”

1. On January 1, 2023, it had a customer base generating $1,000,000 in ARR.
2. During the year, those same customers bought more features, adding $250,000 in expansion ARR.
3. Unfortunately, some customers left or downgraded, resulting in $100,000 in lost ARR from churn and downgrades.
4. The calculation: ($1,000,000 + $250,000 - $100,000) / $1,000,000 = $1,150,000 / $1,000,000 = 1.15
5. StickySoftware's NDR is 115%. They grew their revenue from existing customers by a remarkable 15% in one year, even after accounting for losses!

NDR is a fantastic tool, but it requires context. Knowing what's good, what's bad, and what to be wary of is key to using it effectively.

• NDR > 120% (Elite): This is top-tier performance. It signals a product that is not just liked but is becoming mission-critical for its customers. Companies in this bracket are often market leaders with exceptional growth runways.
• NDR 100% - 120% (Healthy): A very strong result. The business is successfully replacing all of its churned revenue with growth from its loyal customers. This is the sign of a durable, healthy business model.
• NDR < 100% (The Leaky Bucket): This is a red flag. The company is losing revenue from its existing customers. It must rely entirely on expensive new customer acquisition just to stand still. This “leaky bucket” dynamic can signal problems with the product, customer service, or intense competitive pressure.

• Look Beyond the Headline: NDR deliberately excludes revenue from new customers. A company might have a stellar NDR but be failing to attract new business. Always analyze NDR alongside new customer growth for a complete picture of the company's health.
• Watch for Concentration: Is that shiny 125% NDR driven by thousands of customers upgrading, or by one giant client signing a massive expansion deal? High customer concentration can make NDR figures volatile and risky. A broad-based, healthy NDR is always preferable.
• Check the Fine Print: Not all companies calculate NDR in exactly the same way. Always check the footnotes in a company's financial reports (like the 10-K) or investor presentations to understand their specific methodology. Consistency is key, so track the NDR trend over several quarters or years.