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Contraction MRR is the total reduction in MRR due to downgrades and subscription cancellations (or churn) compared to the previous month.
At the most basic level, contraction monthly recurring revenue is a measure of customer churn for a subscription business.
It’s important for subscription-based businesses to know this number so they can accurately measure financial performance and make informed decisions. Your business may need to respond to high contraction monthly recurring revenue with pricing changes or other adjustments. If your contraction MRR is low, though, it’s usually good news that means your subscription company has a steady cash flow and your customers are overall, happy.
Contraction MRR has many causes, some of which are less obvious than others.
Here are a few reasons that your MRR could contract (or reduce) when
A customer cancels a monthly subscription or stops paying for the product.
A customer downgrades from the existing plan to a lower-priced one.
A new customer avails a discount.
A customer removes any add-ons (like additional features, users, etc.)
Contraction MRR = Downgrade MRR + Cancellation MRR
Contraction MRR helps you understand how well your business is able to retain customers is and how well your product scales with your customers’ growth.
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.