What is ARR Waterfall?
Annual Recurring Revenue (ARR) Waterfall is a comprehensive metric in the SaaS industry, representing the annualized value of recurring revenue from active accounts in each period. It breaks down the various factors contributing to a company's ARR, encompassing:
- Start of Period ARR: Revenue from existing customers at the beginning of the period.
- New ARR: Revenue from customers acquired during the specific period.
- Expansion ARR: Additional revenue from existing customers, typically due to upsells.
- Contraction ARR: Decrease in revenue from existing customers due to downgrades or reduced usage.
- Churned ARR: Revenue loss due to customer attrition.
ARR serves as the lifeblood for businesses operating on subscription models, providing crucial insights into financial health, growth trajectory, and long-term viability.
The Importance of Measuring ARR Waterfall
ARR Waterfall is an essential metric and a diagnostic tool for any SaaS business, offering:
- Comprehensive Revenue View: It presents a detailed picture of revenue development across different periods, making it indispensable for executive dashboards and business reports.
- Strategic Insights: Regular monitoring of ARR Waterfall informs critical business strategies, resource allocation, sales and marketing adjustments, and product enhancements.
- Growth and Risk Identification: The metric highlights areas of growth and potential risks, aiding in strategic decision-making to enhance customer retention and attraction.
How is ARR Waterfall Calculated?
ARR Waterfall is calculated by summing the annualized recurring revenue from active accounts in each period, excluding non-recurring amounts like hardware or one-off onboarding costs. The components are:
- Start of Period ARR: Indicates the ARR at the beginning of the period.
- New Logo ARR: Sums ARR from new accounts.
- Expansion ARR: Sums increased ARR from existing accounts.
- Contraction ARR: Sums decreased ARR from existing accounts.
- Churned ARR: Sums ARR lost from accounts active in the previous period but not in the current one.
ARR Waterfall = Start of period ARR + New logo ARR + Expansion ARR - Contraction ARR - Churned ARR
TechSaaS Inc., a cloud storage provider, used ARR Waterfall metrics to uncover an issue in their revenue operations. Despite strong New ARR, high Churned ARR was negating growth. Upon investigation, they found that customers were leaving due to inadequate security features. Addressing this led to a 30% reduction in churn and a significant increase in Expansion ARR.
Understanding and analyzing the ARR Waterfall is critical for any recurring revenue business. It not only offers a snapshot of current financial health but also guides strategic decisions for sustained growth. Tools like Sightfull facilitate this analysis, providing real-time tracking and predictive analytics for deeper insights.