Business owners want their companies to be highly profitable, successful, have many loyal customers, and constantly attract new customers. However, only some are lucky as every business can have its ups and downs. While some businesses can grow and offer customers something that will meet their needs, others may face much more serious challenges.
Even if your company is doing well today, this does not mean that you understand the full picture of the state of affairs of your business. To understand whether a business is viable and successful, companies compile reports and collect various data.
One of the most useful metrics today is NDR, which helps companies understand how successful a business is and also helps identify points for growth. It helps companies set up a revenue generation process and maintain excellent financial performance. In many ways, companies now rely on advanced tools like the Revenue Grid, which automates many processes and helps keep track of financial performance.
Compared to many other measures, the Net Dollar Retention rate gives a clear picture of how a company is doing. In this regard, regular NDR reports are a must-have.
We’ll talk about what it is, why it’s so important to your company, and give you tips on how you can improve your rate.
A quick look at the definition
The NDR rate can tell you the most important thing – whether you are increasing or losing revenue from your existing customer base every month. In simple terms, this is the percentage of income from your customer base over a certain period.
You can make calculations every month, or once a year. However, if you want to have a clear picture of what is happening with your business, you should make calculations as often as possible. In this case, you can quickly make improvements and come up with more productive strategies.
This rate includes metrics such as plan upgrades, cancellations, cross-sells, and plan downgrades. You can see how many customers you are losing, how many of them are starting to bring you more income, and how many are canceling or downgrading subscriptions. Thus, you can understand whether your business is afloat or not, as well as how relevant your product is.
Why is it extremely important for your company?
When you see a low NDR, you can instantly know that something is going wrong. You lose customers, or they refuse to subscribe in favor of a cheaper one. This is a good indicator of how relevant your product is and how well it meets the needs of your customers.
Not all customers remain loyal. However, with this metric, you can see if your company can make excellent profits if existing customers upgrade their plan and other customers either cancel or downgrade their plan.
How to get the right rate?
You can make calculations quickly and easily. You need to do the following:
- Take your company’s monthly recurring revenue and add all the upgrades;
- Subtract all downgrades and all cancellations from the amount received;
- Divide the amount received by the monthly recurring revenue, and then multiply it by one hundred percent.
Everything is quite simple and you can quickly understand whether your business is booming. If the formula is not clear, then let’s look at all the metrics that it includes:
- Monthly recurring revenue is the revenue from customers that you receive monthly;
- Upgrades – increase in monthly recurring revenue due to customer upgrades;
- Cancellations – decrease in revenue due to unsubscribed customers;
- Downgrades – decrease in monthly income due to customers who have downgraded their plan.
For example, your company’s monthly recurring revenue is $5,000, upgrades are $2,000, cancellations are $300, and downgrades are $400.
We do the following:
- 5000$+ 2000$- 300$- 400$=6300$
- 6300$/5000$=1.26$
- 26*100%=126%
In practice, any indicator above one hundred and twenty percent is excellent. If your rate is one hundred and thirty-five percent, then that’s perfect.
If you have a poor NDR, you need to start reacting quickly to keep your business from sinking. You should analyze sales, and marketing strategies, and understand how relevant your product is and whether it satisfies the needs of customers.
What can you do to improve NDR?
If your rate is less than one hundred and twenty percent, this means that you are starting to lose your grip. However, if you find it early, you can quickly make changes to your business processes, sales, and marketing tactics to gain customer trust and also attract new ones.
Here’s what you can do:
Show customers what they get if they upgrade
Many users prefer to purchase a standard subscription or use the free version. However, they may not be aware of what an upgraded subscription can offer them. You should focus on this to attract the attention of your existing customers. You can do this by using modals, newsletters, and so on.
Conduct surveys to reduce cancellations
Depending on your product, you may be able to conduct online surveys within your app or service to identify those customers who are on the verge of canceling. You can understand the mood of the users as well as their degree of satisfaction. You can also include open-ended questions in your survey to get an idea of what your users specifically don’t like. In this case, you will be able to understand what you need to improve.
Suggest guides and FAQs
No matter how simple and easy it is to use your product, there will always be users who need help. In such cases, you need to provide your customers with all kinds of help to explain to them how to do a certain action, use a feature, and so on. You are better off creating informative guides as well as answering frequently asked questions.
Conclusion
Even if you think that your business is successful, it may not be so. If you want to clearly understand that you are excellent at retaining customers who bring you income, you should regularly calculate the NDR rate using a simple formula. If it is above one hundred and twenty percent, everything is great and you need to achieve new heights. If it is poor, you need to improve sales, as well as improve customer retention strategies and change the product for the better.