Contraction MRR (monthly recurring revenue) is a metric that measures the total amount of lost revenue (downgrades & cancellations) in a given time period.
Knowing your contraction MRR is important for forecasting growth, profitability, and measuring the success of customer retention & expansion strategies.
No matter how good your user acquisition is, having high contraction MRR hinders growth.
To calculate contraction MRR, you simply need to add the total value of downgrades & cancellations (churn).
Here’s the formula:
Contraction MRR = Downgrade MRR + Cancellation MRR
And here’s an example:
You have a SaaS product. In a given month, you experience 5 churning customers, valued at $100 MRR each – a revenue loss of $500 MRR. In the same month, you also have 5 customers who downgrade from a $100/month plan, to a $50/month plan – a revenue loss of $250 MRR.
Added together, the contraction MRR for the month is $750.
Contraction MRR is to be expected. As a business grows, it's highly unlikely that this number will be zero. Some products & businesses are stickier, while others will naturally experience short-term usage and reactivations.
For example, a SaaS product that helps to run surveys might only be needed a few times per year. Meanwhile, a customer success platform like Gainsight or Totango will have much higher average values & longer subscription lifetimes.
If you have high contraction MRR, it can only be due to either downgrades or churns. So firstly, identify which it is (it could be both).
Once you figure out what is causing your contraction MRR, you can start taking steps to reduce it.
Contraction MRR is an important indicator of customer experience, product-market fit, and overall business health. Monitoring it as a customer success KPI (or a product KPI) will help to measure the success of retention & expansion strategies.
Broadly, common causes of contraction MRR include product dissatisfaction, pricing changes, and switching to competitors. Consider asking customers directly, or adding exit surveys, to uncover their reasoning.
The easiest way to track contraction MRR is by using subscription analytics platforms like ChartMogul & Baremetrics, or a payment processor like Stripe. These tools have built-in reports to help you identify contraction MRR month over month.
To reduce contraction MRR, you need to identify the reasons that it occurs, and fix them. That might mean improving product stability, customer service, pricing, or finding ways to add more value through your product.