How to Build an ARR Waterfall (the right way)
And a template, for all the ARR gangsters out here thuggin’
ARR (Annual Recurring Revenue) is like a living, breathing organism. Let’s get into the anatomy lesson.
What you’ll learn:
How ARR goes up
How ARR goes down
Red flags to watch out for
How to build your own waterfall (with template)
OMG there’s so much ARR in here
Your ARR moves every day. It’s because of all the underlying dynamics of customers joining, upgrading, canceling, or downgrading. You can break down your ARR movements into:
ARR Gained Components
A net new logo
Add new products
Raise prices (lol, my fav!)
Come back from the dead, in a full, partial, or larger capacity than before
ARR Lost Components
Get rid of some, but not all products
Price decrease (yea right!)
Customer leaves entirely
What to watch out for:
Not fully understanding contraction
This is also called “shrink”. If you are in a subscription based business, it will be more obvious when customers decrease their license counts upon renewal. But if you are in a usage based business, you’ll have to peel out which parts of contraction are due to a degradation in the customer’s underlying health vs what parts are due to normal seasonality. For example, Snowflake, a usage based company, always sees a contraction in usage during the holidays when people are not at their desks querying their data lakes.
Another red flag is if customers stay at the same overall total ARR value with your company but ctrl + alt + delete one of the products they currently hold for a net new one. If your company sells, say, five products, customers may only have room in their budget for at most three, and will pick the three most critical out of the bunch. You should note which of your products get cannibalized for others.
This is always a hard one to look at - it’s difficult to admit that not all your kids are equally your favorite. But customers speak with their feet.