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Frameworks, core principles and top case studies for SaaS pricing, learnt and refined over 28+ years of SaaS-monetization experience.
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Net Dollar Retention (NDR) is arguably the most important growth metric for SaaS companies, acting as a powerful indicator of business health and future growth potential. While many executives track NDR at the company level, segmented NDR analysis offers far more actionable insights that can transform your strategic decision-making. This article walks through how to calculate and leverage NDR by segment to drive sustainable growth.
Understanding Net Dollar Retention: The Basics
Net Dollar Retention measures how much revenue you retain from existing customers over time, including expansions, contractions, and churn. The formula is relatively straightforward:
NDR = (Starting Revenue + Expansions - Contractions - Churn) / Starting Revenue × 100%Where:
- Starting Revenue: Revenue from existing customers at the beginning of the period
- Expansions: Additional revenue from existing customers (upsells, cross-sells)
- Contractions: Reduction in revenue from existing customers who downgraded
- Churn: Revenue lost from customers who canceled
An NDR above 100% indicates that growth from existing customers exceeds losses from downgrades and cancellations. According to OpenView Partners' 2022 SaaS Benchmarks, top-performing public SaaS companies maintain NDR between 120-130%.
Why Segment Your NDR Analysis?
Company-wide NDR can mask critical performance variations across different segments of your business. According to Bessemer Venture Partners, segmenting NDR analysis provides three key benefits:
- Identifies growth opportunities: Discover which segments naturally expand
- Highlights retention challenges: Pinpoint where customers are churning most
- Informs resource allocation: Direct investment toward high-performing segments
How to Calculate NDR by Segment: Step-by-Step Approach
Step 1: Define Meaningful Segments
Begin by determining which segments provide the most actionable insights for your business. Common segment types include:
- Customer size (SMB, Mid-market, Enterprise)
- Industry vertical (Healthcare, Finance, E-commerce, etc.)
- Product line or feature usage
- Acquisition channel (Direct, Partner, Self-serve)
- Geography or region
Step 2: Gather the Required Data
For each segment, collect these data points for your analysis period (typically quarterly or annually):
- Starting MRR/ARR for all customers in the segment
- Expansion revenue within the segment
- Contraction revenue within the segment
- Churned revenue from the segment
Step 3: Calculate Segment-Specific NDR
Apply the NDR formula to each segment:
Segment NDR = (Segment Starting Revenue + Segment Expansions - Segment Contractions - Segment Churn) / Segment Starting Revenue × 100%Step 4: Visualize and Compare Results
Create a dashboard that allows you to:
- Compare NDR across segments
- Track segment NDR trends over time
- Identify outliers and success patterns
Case Study: Segment NDR Analysis in Action
Datadog, a cloud monitoring provider that achieved a remarkable 130%+ NDR, attributes its success to segment-specific retention strategies. According to their public earnings reports, they discovered that enterprise customers had significantly higher NDR (140%+) than SMB customers (110%).
This insight led them to:
- Increase enterprise sales investments
- Develop specific expansion playbooks for high-value segments
- Create tailored retention programs for segments with higher churn risk
The result was accelerated revenue growth and improved overall company NDR.
Common Pitfalls to Avoid When Calculating Segmented NDR
1. Segments That Are Too Small
Ensure each segment contains enough customers to provide statistically significant data. According to ProfitWell research, segments should generally contain at least 50-100 customers to provide reliable NDR calculations.
2. Inconsistent Timeframes
Use consistent measurement periods across segments. Comparing quarterly NDR in one segment to annual NDR in another will lead to misleading conclusions.
3. Ignoring Customer Cohorts
New customers often behave differently than tenured ones. Consider analyzing NDR by both segment and cohort age for deeper insights.
4. Failing to Account for Seasonality
Some segments may have inherent seasonality. Adjust your analysis timeframes or use trailing twelve months (TTM) data to mitigate seasonal effects.
Using Segmented NDR to Drive Strategic Decisions
Once you've calculated NDR by segment, leverage these insights to:
1. Refine Your Ideal Customer Profile (ICP)
Segments with consistently high NDR likely represent your true ICP. According to research from SaaS Capital, companies that align their go-to-market strategy with high-NDR segments grow 20% faster than those who don't.
2. Optimize Customer Success Resources
Allocate customer success resources proportionally to segment value. High-value segments with strong expansion potential deserve more attention than low-value segments with structural churn issues.
3. Guide Product Development Priorities
Prioritize feature development for segments showing the strongest retention and expansion signals. According to Gainsight, product enhancements targeted at high-NDR segments yield 3x higher ROI than general development.
4. Inform Pricing and Packaging Strategies
Use segment NDR insights to identify opportunities for value-based pricing adjustments or packaging modifications that could improve expansion rates.
Conclusion: Moving Beyond One-Size-Fits-All NDR
Calculating Net Dollar Retention by segment transforms a useful metric into a strategic growth tool. The differences in NDR across customer segments often reveal the most promising paths to sustainable growth—whether that's doubling down on high-performing segments, fixing retention issues in struggling segments, or rethinking your approach to certain customer types altogether.
By implementing segmented NDR analysis, SaaS executives gain a clearer picture of their business health and a competitive advantage in planning strategic investments. Start with a few meaningful segments, establish a consistent measurement framework, and let the data guide your next growth decisions.