What is ARR waterfall?
The annual recurring revenue (ARR) metric represents the annualized value of the recurring revenue from active accounts in each period. The amount of ARR is based on the closed won opportunities related to each customer account. This can be broken down into the different types of ARR in each period, including New Logo ARR, Expansion ARR, contraction ARR, churn ARR and ARR at the Start of Period.
Why is it important to measure our ARR waterfall?
ARR is perhaps the most important metric for any SaaS business. ARR warterfall provides a direct view of the development of revenue across different time periods. This metric is a must-have for any executive dashboard and general business report, as well as a great starting point for deep dive investigations of business performance trends.
How is ARR waterfall calculated?
The ARR waterfall metric is calculated by summing the annualized amount of recurring revenue attributed to the active accounts in each period. This sum excludes non-recurring amounts such as hardware or one-off onboarding costs. The metric indicates how ARR developed during the period by categorizing ARR into different components based on their origin:
- Start of Period indicates the ARR at the beginning of the period.
- New Logo sums the ARR from accounts that did not have ARR in the preceding period. Note that this component looks at the immediately preceding period only; accounts may have had ARR in earlier periods.
- Expansion sums the ARR of accounts that grew from the preceding period. The component sums the delta between the preceding and current periods.
- Contraction sums the ARR of accounts that declined from the preceding period. The component sums the delta between the preceding and current periods.
- Churned sums the ARR of accounts that were active in the preceding period, but have no ARR in the current period.