Mastering ARR: The Power of Waterfall Charts for SaaS Businesses

27 February 2025

Ambitious Startups, Building a Business, Cloud Accounting, Digital & Tech, Selling a Business, Structuring a Business

SaaS founders know that Annual Recurring Revenue (ARR) isn’t just a number—it’s a key driver of their business value.

Unlike traditional companies, where profitability often dictates worth, SaaS businesses are frequently valued based on their ARR.

In fact, many loss-making SaaS companies have sold for millions purely because of their strong recurring revenue.

Opportunities

What investors and buyers of SaaS businesses really care about isn’t just the ARR itself—it’s the opportunity behind it.

They want to know:

Is there potential for strong growth?
How much impact will churn have?
Can revenue be expanded through upsells?
Is there room to increase pricing?

The answers to all these questions can all be found within your ARR data—and a waterfall chart helps bring them to light.

In this blog, we’ll explore what waterfall charts are, why they matter, and what data you need to create them.

What is a Waterfall Chart?

A waterfall chart is a type of data visualisation that shows how an initial value is affected by a series of intermediate positive and negative values before arriving at a final value.

The chart typically uses bars to represent changes in value, making it easy to see individual contributions to an overall total.

The structure of a waterfall chart consists of:

An initial value (starting point)
A series of incremental increases and decreases (steps)
A final total value (end point)

Unlike traditional bar charts, waterfall charts show a flow of changes, often colour-coded to differentiate between positive and negative movements.

Why Are Waterfall Charts Important in Recurring Revenue Analysis?

Waterfall charts are invaluable for businesses with subscription-based models (SaaS) or recurring revenue streams for several reasons:

Customer Retention and Churn Analysis

They allow businesses to track how customer subscriptions change over time, identifying key drivers of churn and retention.

Revenue Growth Breakdown

They help in dissecting revenue growth by highlighting new customers, expansions, contractions, and lost customers.

Improved Decision-Making

By visually presenting data, decision-makers can quickly identify trends, strengths, and weaknesses within a business’s revenue streams.

Better Communication

Complex revenue movements can be simplified, making it easier to share insights with executives, investors, and stakeholders.

Trend Analysis

They highlight recurring revenue patterns over time, enabling companies to track performance changes and areas of improvement.

What Data is Needed for a Waterfall Chart in Recurring Revenue Analysis?

To build a waterfall chart for recurring revenue, the following data elements are required:

Starting Monthly Recurring Revenue (MRR)

The total revenue from active subscriptions at the beginning of the period.

New MRR

Revenue gained from new customers.

Expansion MRR

Revenue from existing customers upgrading, purchasing additional services or price increases.

Contraction MRR

Revenue lost due to downgrades or reduced services.

Churn MRR

Revenue lost due to customer cancellations.

Ending MRR

The total revenue at the end of the period after accounting for gains and losses.

Breaking Down the Key Data for Your Waterfall Chart

In practice you typically need to calculate 6 key totals.

However each element can be expanded- for example expansion MRR to show upgrades, additional services and price increases.

This level of detail provides invaluable insights, such as identifying whether revenue growth is driven by additional services rather than price increases.

The challenge in creating your waterfall chart is that the necessary data isn’t always readily available in your sales system (e.g., Stripe).

However, data exports of all transactions from your sales system can be used to generate the data elements through data analytics.

If this is an area where you need support, we can assist in analysing the data needed for your waterfall chart.

Example: Recurring Revenue Waterfall Chart

Below is an example of how a recurring revenue analysis waterfall chart might look.

It visually represents how different revenue components contribute to the final MRR:

This chart represents the Starting MRR and Ending MRR as total columns, with revenue changes (new, expansion, contraction, churn) displayed as incremental steps.

Turning Data into Actionable Insights

Data without analysis is just numbers—but when properly examined, it becomes a powerful tool for growth.

Understanding the movements within your ARR is essential to making informed strategic decisions.

A waterfall chart doesn’t just highlight where revenue is increasing or decreasing; it reveals why these changes are happening.

By analysing these patterns, SaaS founders can pinpoint opportunities to optimise pricing, reduce churn, and increase customer lifetime value.

Whether you’re preparing for an investment round, planning growth strategies, or simply want a clearer picture of your business’s financial health, a well-structured waterfall chart provides the insights you need to take decisive action.