A retention waterfall reconciles beginning ARR to ending ARR for one month, assigning every dollar of movement to a named line. Run it every month and the series stops reporting retention and starts explaining it, because each change in the rate traces to a specific bucket.
The structure ORM uses
ORM builds the waterfall by month with these lines:
| Line | Side |
|---|---|
| Beginning ARR | Opening balance |
| Churned customer ARR | Contraction |
| Churned product ARR | Contraction |
| Product decrease ARR | Contraction |
| New customer ARR | Expansion |
| New product ARR | Expansion |
| Increased product ARR | Expansion |
| Ending ARR | Closing balance |
Pete Furseth at ORM describes the monthly reconciling waterfall as magic, and the reason is the constraint. If beginning ARR does not tie to the prior close, something was booked outside the model, and the mismatch surfaces the same month instead of during an audit two quarters later.
Why the split into three contraction lines matters
A single churn line answers nothing. Splitting it says where the revenue went.
Churned customer ARR means the account is gone. Churned product ARR means a multi-product customer dropped one product and kept the rest, which is usually a specific product failing to justify its renewal rather than a relationship problem. Product decrease ARR means the customer kept everything but bought less of it, typically seats or volume.
Those three failures have different owners and different fixes. Collapsing them into one number sends every team after the same generic retention initiative, and the one team that could have moved the number never sees the signal that belongs to it.
The expansion side needs the same discipline
New customer ARR, new product ARR, and increased product ARR describe three separate motions. New logos come from sales. Cross-sell of an additional product usually comes from a customer success or account management play. Volume growth on an existing product often comes from the customer's own headcount rather than from anything you did.
Keeping them apart is what makes net revenue retention meaningful, since the metric depends on excluding new logos from the numerator. It also stops a strong new logo month from covering a bad retention month, which is the most common way a retention problem stays invisible for two or three quarters.
Feeding the forecast
The waterfall doubles as the input structure for the retention side of a plan. Each line has its own drivers and its own history, so each can be projected separately rather than through a single blended rate applied to the base. That matters because the streams move independently, and a model that nets them together loses the ability to explain which one moved. Build the revenue forecast on the same line items the waterfall reports, and forecast against actual becomes a line by line comparison rather than an argument about the total.
Frequently Asked Questions
What line items belong in the waterfall?
ORM builds it by month as beginning ARR, churned customer ARR, churned product ARR, and product decrease ARR on the contraction side, then new customer ARR, new product ARR, and increased product ARR on the expansion side, closing at ending ARR. Beginning ARR is always the prior month's ending ARR.
Why separate churned customer ARR from churned product ARR?
They have different causes and different owners. Losing the whole account is a relationship or value failure. Losing one product from a multi-product account is usually a specific product failing to earn its line item, and it is often the early warning that the full account leaves next cycle.
Why run it monthly instead of quarterly?
A quarterly view collapses three months of movement into one bar, so a bad January hidden by a strong March never surfaces. Monthly cadence also makes the reconciliation self checking, since any month whose beginning balance fails to match the prior close means a movement was booked outside the waterfall.
Where do gross and net revenue retention sit?
On the same chart as the waterfall. Gross revenue retention comes from the contraction lines measured against beginning ARR. Net revenue retention adds the expansion earned on existing customers. Keeping new customer ARR on its own line is what stops new logos from leaking into the net retention figure.
Put these metrics to work
ORM builds custom revenue forecast models that turn concepts like monthly arr retention waterfall into prescriptive action for your team.
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