MRR / ARR subscription waterfall model

Revenue only moves in five ways

Every subscription business is the sum of five monthly movements: new MRR from new customers, expansion MRR from existing customers buying more, contraction MRR from downgrades, churned MRR from lost customers, and the starting base. Modelling those five explicitly rather than forecasting a single growth percentage is what makes a SaaS model defensible in diligence.

The reason matters commercially: two businesses can both grow 6% monthly with completely different risk profiles. One grows on new logos with 3% churn; the other grows mostly on expansion with 0.5% churn. The second is worth substantially more, and only the waterfall view reveals which one you have.

Ending MRR = Starting MRR + New + Expansion − Contraction − Churn

NDR = (Starting + Expansion − Contraction − Churn) ÷ Starting
GRR = (Starting − Contraction − Churn) ÷ Starting
Quick ratio = (New + Expansion) ÷ (Churn + Contraction)

NDR and GRR answer different questions

Net dollar retention includes expansion, so it measures whether your existing customers spend more over time. Gross revenue retention excludes expansion, so it measures whether you keep what you already had. NDR flatters a business with strong upsell and weak retention; GRR tells you the truth.

Both matter, and the benchmark thresholds differ. NDR above 110% is strong for SMB SaaS and above 120% is exceptional. GRR below 85% is a structural problem regardless of how good expansion looks, because it means the base is leaking faster than you can patch it.

The quick ratio: growth efficiency in one number

The SaaS quick ratio divides the MRR you added by the MRR you lost: (new + expansion) ÷ (churn + contraction). A ratio of 4 means you added four dollars for every dollar lost. Below 2, the business is running to stand still; above 4 is best-in-class.

The ratio is useful because it is scale-independent, which makes it comparable across periods and across companies. It also exposes the trap of celebrating gross new sales while ignoring churn: a company adding $40,000 of new MRR and losing $20,000 has a quick ratio of 2 and a chronic retention problem, no matter how good the sales quarter looked.

• Below 2x: growth is being consumed by churn — fix retention before adding sales capacity.
• 2–4x: functional but not efficient; expansion is usually the fastest lever.
• Above 4x: efficient growth; invest behind acquisition.
• Track it monthly, not quarterly — quarterly smoothing hides churn spikes.

Forecasting without lying to yourself

The single most common modelling error is assuming new MRR stays constant or grows indefinitely. In practice, new-business productivity decays as you exhaust the easiest channels and your best-fit prospects. The workbook includes a monthly decay rate for new and expansion MRR, defaulting to 3%, which turns a hockey stick into something closer to reality.

The second error is assuming churn is stable. Churn usually rises as the customer base matures and as cohorts from a period of rapid, lower-quality acquisition reach the end of their first contract term. A defensible model increases churn over time or runs a downside scenario where churn doubles.

• Apply a decay rate to new MRR; assume the current quarter is the best quarter until proven otherwise.
• Stress-test churn doubling for two quarters — that is the scenario a board will ask about.
• Model expansion separately from new business; they have different cost structures and different risks.
• Reconcile the model to the accounting system monthly — a model that does not tie out is not a model.