Understanding the MRR Waterfall
An MRR waterfall is a financial visualization or table that explains exactly how a company's MRR changed from the beginning of a month to the end of that month. It bridges the gap between starting revenue and ending revenue by accounting for every dollar gained or lost.
By dissecting revenue into specific categories, founders and investors can diagnose whether growth is being driven efficiently by new customer acquisition, organically through upselling existing customers, or if a leaky bucket of churn is negating sales efforts.
The Components of Revenue Movement
Building a waterfall requires categorizing MRR changes into four standard buckets. 'New MRR' comes from brand new customers acquired during the month. 'Expansion MRR' is additional revenue generated from existing customers who upgraded their plans or bought add-ons.
On the negative side, 'Contraction MRR' reflects existing customers who downgraded to cheaper tiers or reduced usage. Finally, 'Churn MRR' accounts for revenue completely lost due to customers canceling their subscriptions entirely.
- Beginning MRR: The starting balance.
- New MRR (+): Revenue from newly acquired customers.
- Expansion MRR (+): Upgrades from existing customers.
- Contraction MRR (-): Downgrades from existing customers.
- Churn MRR (-): Cancellations.
- Ending MRR: The final resulting balance.
How to Calculate the MRR Waterfall
The fundamental equation for the waterfall is straightforward arithmetic, balancing inflows and outflows to determine the new baseline for the following month.
Formula: Ending MRR = Beginning MRR + New MRR + Expansion MRR - Contraction MRR - Churn MRR
Example: A company starts with $100,000 in Beginning MRR. During the month, they add $15,000 in New MRR and $5,000 in Expansion MRR. However, they suffer $2,000 in Contraction and $4,000 in Churn. Their Ending MRR = $100,000 + $15,000 + $5,000 - $2,000 - $4,000 = $114,000.
Calculating Retention Rates (NRR & GRR)
The waterfall data allows you to calculate critical retention metrics. Net Retention Rate (NRR) measures how much revenue you retained from your existing customer base, inclusive of expansion and churn.
Formula: NRR = (Beginning MRR + Expansion MRR - Contraction MRR - Churn MRR) / Beginning MRR.
Using the previous example: ($100,000 + $5,000 - $2,000 - $4,000) / $100,000 = $99,000 / $100,000 = 99% NRR. Gross Retention Rate (GRR) ignores expansion and only looks at losses: ($100,000 - $2,000 - $4,000) / $100,000 = 94% GRR.
Analyzing the SaaS Quick Ratio
The SaaS Quick Ratio measures a company's ability to grow despite churn. It is calculated by dividing total MRR gained (New + Expansion) by total MRR lost (Contraction + Churn).
A Quick Ratio greater than 4.0 is generally considered healthy, indicating that the company is adding four times more revenue than it is losing, ensuring strong, sustainable growth even if some churn occurs.
Frequently asked questions
What is a good Net Retention Rate (NRR)?
For SMB SaaS, an NRR around 100% is typical. For Enterprise SaaS, an NRR over 110% to 120% is excellent, indicating that revenue from existing customers grows faster than it churns.
Should annual contracts be included in MRR?
Yes, but they must be amortized. An annual contract of $12,000 paid upfront should be recorded as $1,000 MRR in your waterfall calculations.
What is negative churn?
Negative churn occurs when your Expansion MRR exceeds your Contraction and Churn MRR combined. It means your existing customer base is growing its revenue contribution automatically.
Why is GRR always lower than NRR?
Gross Retention Rate (GRR) caps at 100% because it does not include Expansion MRR. It strictly measures your ability to retain the exact revenue you started with, penalizing you for downgrades and cancellations.