ARR Waterfall by Parent

What is ARR Waterfall by Parent?

Annual Recurring Revenue (ARR) Waterfall by Parent accounts 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 parent accounts at the beginning of the period.
• New ARR: Revenue from parent accounts acquired during the specific period.
• Expansion ARR: Additional revenue from existing parent accounts, typically due to upsells.
• Contraction ARR: Decrease in revenue from existing parent accounts 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 by Parent

ARR Waterfall by Parent 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 by Parent 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 parent accounts retention and attraction.

How is ARR Waterfall by Parent Calculated?

ARR Waterfall by Parent 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 parent accounts.
• Expansion ARR: Sums increased ARR from existing parent accounts.
• Contraction ARR: Sums decreased ARR from existing parent accounts.
• Churned ARR: Sums ARR lost from parent accounts active in the previous period but not in the current one.

Formula

ARR Waterfall by Parent = Start of period ARR by Parent + New logo ARR by Parent + Expansion ARR by Parent - Contraction ARR by Parent - Churned ARR by Parent

Illustrative Example

TechSaaS Inc., a cloud storage provider, used ARR by Parent Waterfall by Parent metrics to uncover an issue in their revenue operations. Despite strong New ARR, high Churned ARR was negating growth. Upon investigation, they found that parent accounts were leaving due to inadequate security features. Addressing this led to a 30% reduction in churn and a significant increase in Expansion ARR.

Conclusion

Understanding and analyzing the ARR Waterfall by Parent 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.