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What is Contraction Monthly Recurring Revenue?

By Jerusha Songate on April 06, 2021
Last updated on June 18, 2024

When you’re looking at your business goals, you need to consider not only your existing monthly revenue but your contraction monthly recurring revenue (MRR).

Contraction Monthly Recurring Revenue (MRR) is an extremely important metric for subscription businesses. Measuring and planning around contraction MRR has to be done regularly, and it becomes easier with Baremetrics.

Learn how Baremetrics supports you in reducing churn and improving MRR with a 14-day free trial.

Here are all the facts you need to determine the full picture of your contraction MRR.

How to Calculate Contraction MRR

Contraction MRR is the total reduction in MRR due to downgrades and subscription cancelations (or churn) compared to the previous month.

Calculating your contraction monthly recurring revenue (MRR) is simple enough.

You simply add the total amount of monthly revenue lost from cancelations to the monthly revenue lost from downgrades using this formula:

Contraction MRR = Downgrade MRR + Cancellation MRR

Calculate contraction MRR every month, and assess your contraction ARR at the end of each fiscal year.

When looking at contraction MRR, compare it against your expansion MRR, also known as growth MRR—that is, the growth rate of monthly revenue from upgrades, add-ons, conversions from free trials, and cross-sales.

Keep in mind that expansion MRR does not include any dollars related to new customers, but both contraction and expansion MRR deal exclusively with your existing customers.

Anything to do with new customers would be considered new MRR, a third important metric for your subscription business.

• Expansion MRR is calculated by adding up all-new recurring revenue from existing customers (those who have been subscribers for more than a month).

Ideally, your expansion MRR will be equal to or greater than your contraction monthly recurring revenue (MRR). This essentially means that with new acquisitions aside, your business is maintaining or steadily growing monthly recurring revenue.

Both contraction MRR and expansion MRR can be looked at as month-over-month percentages by using the following formula:

[(Current month MRR – Previous month MRR) / Previous month MRR] X 100

With the appropriate tools in place, you’ll be able to gain this insight without manually calculating the data each month.

Baremetrics automates payment processing and e-commerce reporting for subscription businesses, delivering detailed insights directly to your inbox according to your schedule.

Recommended reading: How to calculate monthly recurring revenue(MRR)

With a subscription business, cancelations are inevitable. While we wish that 100 percent of our customers remained with us for life, that simply isn’t realistic.

However, if your business offers multiple subscription levels, you’ll likely see some customers each month who choose to downgrade to a lower-cost option.

In many cases, having a customer downgrade is far more desirable than canceling completely. The lost revenue from a downgrade is less than a total loss—after all, having some revenue from that customer is better than having none.

Generally speaking, retention becomes simpler when your customers know they have options available.

Recommended reading: Recover and Cancellation Insights

How to Reduce Churn Rate

Understanding how and why people cancel their subscriptions with your business is critical to helping reduce churn and potentially recover the subscriber.

Upon receiving the cancellation request, you should ask customers to state their reason why and allow yourself to correct the issue.

Often, you’ll hear objections about pricing. When a customer expresses that they’re no longer able to afford your product, you can set to work reminding them of the value they’ve received (and will continue to receive) from using your product.

This is particularly true in the SaaS business space, as changing software can lead to major shifts in operations and data loss—problems that are easily avoided by maintaining a subscription.

If there are continued pricing objections, leveraging an extended free trial or downgrade option can help your sales team potentially recover what would otherwise be a total loss.

Other common reasons for cancellation are related to customer experience. Either they had a negative support interaction, they’re struggling to understand the product, or they are switching to your competitors.

If you have comprehensive metrics and a solid churn management strategy, you’ll potentially be able to address these issues and recover the customer (and the revenue they bring each month).

You may also want to consider reaching out to people who cancel a few months after they’ve canceled to extend an additional trial or discount. This can lead to account reactivation.

This focus on customer lifetime value, rather than just month-to-month increases and decreases, helps your MRR churn become less of an issue compared to your total MRR.

Recommended reading:  How do you calculate retention rate

Leveraging Baremetrics to Improve Contraction MRR

Baremetrics is the ideal tool for subscription businesses to get the insight they need. Uniquely designed with data at the forefront, Baremetrics leverages automation and your customer base’s behavior to help you enhance your business.

For improving contraction MRR, Baremetrics delivers not only monthly reports with the information you need but intelligently helps you fix failed payments and gain valuable insights about cancelations to reduce churn and improve contraction MRR.

MRR metrics aren’t the only KPIs that Baremetrics can measure. Looking holistically at your business’s current state while forecasting for the future lets you develop a comprehensive business strategy, whether you’re a startup or an enterprise subscription business.

One of the beautiful things about a subscription business is having consistent monthly recurring revenue (MRR). With a reliable stream of cash flowing from loyal customers, you’re able to consistently predict your growth, budget for your business’s marketing and operations, and position yourself for long-term success.

Jerusha Songate

Jerusha has a strong interest in SaaS and finding new business opportunities. She writes for Baremetrics as part of her passion for business journalism.