What's the difference between ARR waterfall and revenue waterfall?

ARR waterfall tracks recurring revenue at a point in time. Revenue waterfall tracks recognized revenue over a period. ARR is the leading indicator; revenue is the accounting result. Both matter but they answer different questions.

Should the waterfall include one-time revenue?

No — ARR is recurring by definition. Professional services, implementation fees, and one-time add-ons are reported separately. Mixing them into ARR waterfall makes the metric less comparable period-over-period.

How is the waterfall different from cohort analysis?

The waterfall shows period-to-period change across the whole book. Cohort analysis shows how a specific vintage of customers behaves over time. Both are needed for a full retention picture.

ARR Waterfall: New, Expansion, Contraction, Churn

An ARR waterfall (or ARR bridge) decomposes period-over-period ARR change into new, expansion, contraction, and churn components.

ARR Waterfall: The Reporting View Investors Actually Want to See

An ARR waterfall — also called an ARR bridge — is a standard reporting view that decomposes the change in Annual Recurring Revenue between two periods into its underlying components: starting ARR, plus new logo ARR, plus expansion ARR, minus contraction ARR, minus churned ARR, equals ending ARR. Every growth-stage SaaS board deck includes one. Investors read it to understand the health of the business in one view.

The standard format

Row layout: (1) Starting ARR (period start). (2) + New Logo ARR (fully new customers). (3) + Expansion ARR (existing customers who grew — upsell, cross-sell, seat expansion). (4) − Contraction ARR (existing customers who shrank — downgrade, seat reduction). (5) − Churned ARR (customers who fully cancelled). (6) = Ending ARR. Report monthly for internal review, quarterly for board, annually for investor summary.

Common presentation formats

Two visual conventions: (a) Stacked bar chart with starting ARR on the left, ending ARR on the right, and intermediate bars showing each component as a positive or negative delta. (b) Table format with periods as columns and components as rows. Both are acceptable; the bar chart is more legible to non-operators (VCs, board members), the table is more precise for analysts.

Defining each bucket cleanly

Precision matters. New Logo = customer's first contract with you. Expansion = same customer, higher ARR at renewal or mid-term. Contraction = same customer, lower ARR (but still active). Churn = customer with zero ARR at period end. Edge case: a customer who churns and returns in the same period. Convention: treat as churn + new logo (two events), not as continuous. Consistency across reporting periods matters more than any specific convention.

Segmented waterfalls

Aggregate waterfall hides diagnostic signal. Segment by (a) customer size band — SMB vs Mid-Market vs Enterprise waterfalls show which segment is driving results. (b) product line — helpful once you have 2+ SKUs. (c) geography — for international businesses. (d) acquisition channel — inbound vs outbound. VCs at diligence will ask for segmentation; providing it in the board deck preempts the question.

What the waterfall reveals

Healthy: Expansion + New Logo comfortably exceeds Contraction + Churn, with expansion contributing 30%+ of gross new ARR. Warning signs: churn approaching or exceeding new logo (product-market fit or retention issue), contraction growing faster than expansion (customers shrinking, likely macro or product problem), expansion falling to near zero (mature customer base, need new growth vectors).

Frequently asked questions

What's the difference between ARR waterfall and revenue waterfall?: ARR waterfall tracks recurring revenue at a point in time. Revenue waterfall tracks recognized revenue over a period. ARR is the leading indicator; revenue is the accounting result. Both matter but they answer different questions.
Should the waterfall include one-time revenue?: No — ARR is recurring by definition. Professional services, implementation fees, and one-time add-ons are reported separately. Mixing them into ARR waterfall makes the metric less comparable period-over-period.
How is the waterfall different from cohort analysis?: The waterfall shows period-to-period change across the whole book. Cohort analysis shows how a specific vintage of customers behaves over time. Both are needed for a full retention picture.