What is Contraction MRR?
What Causes Monthly Recurring Revenue to Contract?
Contraction MRR occurs when existing customers reduce their recurring revenue contribution through four primary actions. Understanding these causes helps RevOps teams identify revenue leakage and set up targeted retention strategies.
Your MRR contracts when:
Customer cancellations: Subscribers end their recurring payments entirely
Plan downgrades: Customers switch from higher-value to lower-value subscription tiers
Add-on removals: Existing customers drop additional features, users, or services
Mid-cycle discounts: Promotional pricing applied to existing subscriptions reduces monthly value
How to Calculate Contraction MRR?
Contraction MRR accounts for both downgrade MRR and churn. The formula combines revenue lost from downgrades with revenue lost from complete cancellations.
Contraction MRR = Downgrade MRR + Cancellation MRR
Contraction MRR vs Other MRR Types
Contraction MRR is one part of your overall revenue story. To get a complete picture, you must view it alongside other key MRR metrics. This helps you understand the forces driving your revenue growth or decline.
The primary MRR components include:
New Business MRR: Revenue from new customers acquired during the month
Expansion MRR: Additional revenue from existing customers upgrading or adding services
Contraction MRR: Lost revenue from existing customers downgrading or canceling
Your Net New MRR is the sum of these components. A healthy business sees expansion and new business MRR consistently outweigh contraction MRR. Tracking these metrics separately gives RevOps leaders clear insight into acquisition, retention, and expansion efforts.
How Should Your Business Interpret Contraction MRR?
Contraction MRR reveals two critical business health indicators: customer retention effectiveness and product-market fit alignment.
If your contraction MRR is high, it could mean:
Your customers are canceling their subscriptions or in other words, churning.
Your customers are downgrading to lower plans as they either don't find value in your higher price plans.
Defining a Good Contraction MRR Rate
Contraction MRR benchmarks vary based on business maturity and model. Based on recent industry data (2023), high-performing SaaS companies maintain specific targets.
Benchmark targets by stage:
Early-stage (< $5M ARR): 2-5% monthly contraction acceptable during product-market fit
Growth-stage ($5-50M ARR): Target 1-3% monthly contraction
Mature SaaS (> $50M Annual Recurring Revenue (ARR)): Top-performing companies maintain < 1.0% monthly contraction
Companies achieving high growth rates consistently monitor contraction trends and investigate any month-over-month increases above their target range.
Managing Contraction MRR for Sustainable Growth
Reducing contraction MRR requires systematic monitoring and proactive intervention. RevOps teams should focus on three key areas to minimize revenue loss.
Essential strategies:
Root cause analysis: Track downgrade and cancellation reasons to identify product or pricing gaps
Automated retention workflows: Deploy smart dunning and win-back campaigns to prevent involuntary churn
Customer health scoring: Monitor usage patterns and engagement metrics to predict contraction risk
A unified revenue management platform provides the real-time visibility needed to track contraction patterns and respond quickly. See how Chargebee helps you monetize with confidence — book your personalized demo today.
Frequently Asked Questions About Contraction MRR
What does MRR stand for?
MRR stands for Monthly Recurring Revenue. It is a predictable measure of the revenue a subscription-based business expects to receive every month.
How contraction MRR relates to churn rate
Churn rate measures the percentage of customers who cancel. Contraction MRR measures the total revenue value lost from both cancellations (churn) and downgrades, providing a more complete financial impact.
Should I include refunds in contraction MRR calculations?
No, contraction MRR typically tracks the loss of recurring revenue value from subscriptions. Finance teams usually account for one-time refunds separately, so they do not affect the MRR calculation.
How often should I measure contraction MRR?
As the name suggests, you should measure contraction MRR on a monthly basis. This allows for consistent tracking and timely intervention if you notice negative trends.
What's the difference between gross and net MRR churn?
Gross MRR churn equals Contraction MRR — total revenue lost from existing customers. Net MRR churn subtracts expansion MRR from gross churn, showing your actual revenue change from the existing customer base.
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