The ARR bridge

Every serious SaaS operating review shows an ARR bridge (also called a waterfall). Growth is not a single vanity percentage. It is the sum of four movements on the stock of ARR.

If you can read the bridge, you can tell whether growth is real, whether customers are expanding, and whether the company is quietly rotting under a shiny top line.

The big idea

A reservoir has inflows and leaks. New logos and expansion fill it. Contraction and cancels drain it. Ending ARR is what is left. Net new ARR is the net of those four pipes.

The analogy breaks if you dump brand-new logos into a "retention" number. Retention ratios should be computed on the starting base, not on people you just acquired. See GRR and NRR.

Walking through it

Ending ARR =
  Starting ARR
  + New ARR          (brand-new logos)
  + Expansion ARR    (upsells, seats, modules, price increases)
  − Contraction ARR  (downgrades, seat reductions — customer stayed)
  − Churned ARR      (logos that fully cancelled)

Net new ARR = new + expansion − contraction − churn. That single number is what growth rate is made of.

Start the year at $10.0M ARR. During the year you add $3.0M new logos, $2.0M expansion, lose $0.5M to contraction, and $1.0M to full churn.

Ending ARR = 10.0 + 3.0 + 2.0 − 0.5 − 1.0 = $13.5M
Net new ARR = 3.0 + 2.0 − 0.5 − 1.0 = $3.5M
YoY growth  = 3.5 / 10.0 = 35%

Headline growth of 35% looks fine — until you notice $1.5M of the base leaked via contraction + churn. The retention metrics separate that leak from new-logo hustle.

Common mistakes

• Reporting only ending ARR. Without the four pipes you cannot see the leak.
• Calling price increases "new ARR." That is expansion on existing logos.
• Mixing a cancelled whale into "contraction." If the logo is gone, it is churn.
• Celebrating 35% growth while $1.5M of the old base disappeared.

Check yourself

Start $10M, +$3M new, +$2M expansion, −$0.5M contraction, −$1M churn. What is net new ARR?

$3.5M, and ending ARR is $13.5M.

Why is 35% growth not the end of the review?

Because $1.5M leaked from the base. Sales may be papering over churn.

Key takeaways

• The bridge is start + new + expansion − contraction − churn.
• Net new ARR is what growth rate is made of.
• A shiny growth % can hide a leaking base.
• Keep new logos out of retention ratios. Those belong on the starting base.

Further learning

SaaS Metrics 2.0 (David Skok)“If you cannot measure it, you cannot improve it” – Lord Kelvin This article is a comprehensive and detailed look at the key metrics that are needed to understand and optimize a SaaS business. It is a completely updat…For Entrepreneurs

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