Contraction Monthly Recurring Revenue (MRR) is the recurring revenue lost when existing customers downgrade their subscriptions. Revenue lost to cancellations is counted separately, as churned MRR. When you’re looking at your business goals, you need to consider not only your existing monthly revenue but this contraction MRR. This metric is crucial for understanding the overall health of your business.
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.
Add up the monthly recurring revenue lost from downgrades by existing customers during the month. Calculate contraction MRR every month, compare it against expansion MRR, and assess contraction ARR at the end of each fiscal year.
Contraction MRR is the total reduction in MRR due to downgrades from existing customers compared to the previous month. Cancellations (churn) are tracked separately as churned MRR.
Calculating your contraction monthly recurring revenue (MRR) is simple enough.
You simply add up the monthly revenue lost from every downgrade in the month using this formula:
Contraction MRR = Downgrade MRR
This is how Baremetrics reports it: our help center defines contractions as revenue lost from downgrades or reduced usage, and counts churned MRR separately (Revenue Model). A downgrade to a free plan counts as a cancellation, not a contraction (Cancellations and Downgrades).
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, 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.
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 subscription reporting for subscription businesses, delivering detailed insights directly to your inbox according to your schedule.
Learn about this function first-hand with a 14-day free trial.
Recommended reading: How to calculate monthly recurring revenue(MRR)
A downgrade keeps the customer on a lower-cost plan, so you lose part of their revenue, while a cancellation loses all of it. In many cases a downgrade is far more desirable, because some revenue from that customer is better than none.
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
Ask customers why they are canceling when the cancellation request arrives, then address the reason. Remind price-sensitive customers of the value they receive, offer a downgrade option or an extended trial, and consider reaching out a few months later with a discount.
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
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.
Contraction MRR is the recurring revenue lost when existing customers downgrade their subscriptions, compared to the previous month. Revenue lost to cancellations is not contraction; it is counted separately as churned MRR. Tracking the two separately shows whether you are losing whole customers or only part of their spend.
Contraction MRR comes from customers who stay but move to a lower-cost plan, while churned MRR comes from customers who cancel. A downgrade to a free plan counts as a cancellation, not a contraction, because the customer no longer pays you anything at all.
Add up the monthly revenue lost from every downgrade during the month, so Contraction MRR = Downgrade MRR. Calculate it every month and compare it against your expansion MRR.
Ideally, yes. When expansion MRR is equal to or greater than contraction MRR, your business is maintaining or steadily growing monthly recurring revenue from existing customers, setting new acquisitions aside. Expansion MRR includes upgrades, add-ons and cross-sales, but never revenue from new customers.
In many cases, yes. The revenue lost from a downgrade is smaller than the total loss from a cancellation, and keeping some revenue from a customer is better than having none. Offering several subscription levels gives customers options, which generally makes retention simpler.