For Software-as-a-Service (SaaS) businesses, Annual Recurring Revenue (ARR) is often one of the most important indicators of value.
Investors and buyers frequently assess SaaS companies based not only on their current revenue, but also on the stability and growth potential of that revenue stream.
However, ARR on its own tells only part of the story.
To understand the true health of a SaaS business, it is important to analyse how revenue changes over time including new sales, customer churn, and expansion within existing accounts.
One of the most effective ways to visualise these movements is through an ARR waterfall chart.
In this article, we explain what waterfall charts are, why they are valuable for SaaS businesses, and what data is required to build them.
What Is a Waterfall Chart?
A waterfall chart is a visual tool that illustrates how an initial value changes over a defined period through a series of increases and decreases.
The chart typically includes:
- A starting value (for example, opening Monthly Recurring Revenue)
- Incremental changes that either increase or decrease revenue
- A final value showing the closing revenue figure
Unlike a standard bar chart, a waterfall chart shows the sequence of changes that lead from the starting point to the final total.
This makes it easier to understand what is driving overall growth or decline.
Why Waterfall Charts Matter for SaaS Businesses
Subscription-based businesses experience constant changes in their recurring revenue base.
Customers join, upgrade, downgrade, or cancel their subscriptions, all of which impact revenue over time.
Waterfall charts help break down these movements into clearly identifiable components.
Understanding Customer Retention and Churn
Waterfall charts highlight the impact of customer cancellations or reductions in service.
By isolating churn within the analysis, businesses can identify patterns and take steps to improve customer retention.
Analysing Revenue Growth
Growth in recurring revenue can come from several sources, including new customers, upgrades, additional services, or pricing changes.
A waterfall chart allows businesses to see exactly where revenue growth is coming from.
Supporting Strategic Decision-Making
Visualising revenue movements makes it easier for management teams to identify trends, opportunities, and areas of concern. This can inform decisions around pricing strategy, product development, and customer success initiatives.
Communicating Performance
Waterfall charts also provide a clear way to present recurring revenue performance to stakeholders such as investors, lenders, or board members.
What Data Is Needed to Build an ARR Waterfall Chart?
To construct a waterfall chart for recurring revenue analysis, several key data points are required.
Starting Monthly Recurring Revenue (MRR)
The recurring revenue generated by active subscriptions at the beginning of the reporting period.
New MRR
Revenue generated from new customers acquired during the period.
Expansion MRR
Additional revenue generated from existing customers through upgrades, add-on services, or pricing increases.
Contraction MRR
Revenue reductions resulting from customers downgrading their subscriptions or reducing usage.
Churn MRR
Revenue lost from customers who cancel their subscriptions entirely.
Ending MRR
The total recurring revenue at the end of the reporting period after all increases and decreases are accounted for.
In practice, each of these categories can be further analysed.
For example, expansion revenue may be broken down into upgrades, cross-selling of additional services, or pricing adjustments.
Challenges in Preparing Waterfall Charts
While the concept is straightforward, assembling the required data can sometimes be more complex.
Subscription platforms and payment systems do not always produce the necessary metrics in a format that can be used directly.
In many cases, transaction data needs to be extracted and analysed to identify the relevant revenue movements.
Once prepared correctly, however, the resulting chart provides a powerful overview of how recurring revenue is evolving.
Turning Revenue Data into Insight
Understanding how recurring revenue changes over time is essential for any SaaS business seeking to scale or attract investment.
A well-prepared waterfall chart highlights not only whether revenue is growing, but also why it is growing.
It can reveal whether performance is being driven by new customers, deeper engagement with existing customers, or improvements in pricing strategy.
This level of insight can support better decision-making, clearer communication with investors, and stronger long-term growth planning.
Taking Control of the numbers
If you are looking to better understand revenue movements in your SaaS business, clear and structured financial insight is essential.
We can support you in extracting and analysing your data, presenting it in a way that gives you meaningful oversight and that is also suitable for investors or potential buyers.
To find out how we can help, call us on 01634 731390 or book a discovery call.
