Software Growth

Contraction MRR

Contraction MRR is monthly recurring revenue lost when an existing customer downgrades or removes part of their plan but keeps paying.

Contraction MRR is the quiet leak. The customer does not cancel, so no one gets an alert, but they pay you less this month than last month. It sits between healthy expansion and full churn, and it often predicts the second.

How to calculate contraction MRR

For each customer who still pays but pays less, take the decrease and add them up.

If 6 customers drop from a $100 plan to a $50 plan, contraction MRR is 6 x $50 = $300. On a base of $20,000 MRR, that is 1.5% of the base in one month.

ChartMogul's definition includes downgrades, canceling one of several subscriptions, and applying discounts. A customer who cancels their last or only subscription is churn instead.

Growth without signing a new customer. The same customer base • $30,000 − $900 − $300 + $1,500 = $30,300 Fictional monthly example: −1% net revenue churn = 101% net revenue retention.
Fictional monthly example: −1% net revenue churn = 101% net revenue retention. Source / framework reference.

Common causes

  • Seat reductions after a team shrinks.
  • Moving to a cheaper tier because a feature was not used.
  • Dropping an add-on.
  • A discount given to save a cancellation. This is contraction, and it is worth counting because it is how a save offer shows up in the numbers.
  • Lower usage under usage-based pricing.

Why it matters

Contraction is part of revenue churn. Gross figures like gross revenue retention include it, so a business can have low logo churn and still lose a meaningful share of revenue. David Skok's SaaS Metrics 2.0 makes the point that you should look at revenue-based churn, not just customer counts.

How to respond

  • Ask downgrading customers why, with a one-question prompt in the plan-change flow.
  • Check whether the cheaper plan removed a feature they actually use.
  • Watch for customers who downgrade and then cancel within 90 days. If it is common, treat a downgrade as an at-risk signal in your health score.

Small SaaS angle

With a few hundred customers, contraction is often a handful of specific people, so you can email them. Do that. A short note asking what changed is cheaper than any retention tool, and it tells you whether the cause is price, fit or a changed budget.

Sources

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