What Is Contraction MRR? (Definition & Formula)

What is contraction MRR?

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.

How to calculate contraction MRR (formula)

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.

What should you do about contraction MRR?

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).

Causes of high downgrades

  • Your higher plan tiers are not attractive enough for customers
  • Pricing is too high, and/or budgets are tight
  • Inevitably, some factors are outside of your control (e.g. company size reducing)

Causes of high churn

  • Your product isn’t a good fit for that type of customer
  • Your product isn’t sticky enough, and customers don’t need it long-term
  • Bugs, performance and stability issues
  • Competitors delivering more value / features
  • Poor customer service

Once you figure out what is causing your contraction MRR, you can start taking steps to reduce it.

Quick FAQs about contraction MRR

1. Why is contraction MRR important?

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.

2. What are some common causes of contraction MRR?

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.

3. How do I track contraction MRR?

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.

4. What are some ways to reduce contraction MRR?

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.