In an ideal world, your monthly recurring revenue (MRR) would go in one direction—up.
However, we know that’s not the case.
Customers cancel and downgrade their subscriptions every month. And that’s why it’s important to track contraction MRR.
Curious about what contraction MRR is and how it affects your business? Read on.
What is Contraction MRR?
Contraction monthly recurring revenue, or contraction MRR, is the total reduction in MRR for a given month through downgrades or churns.
Yes, this is similar to downgrade MRR—the amount of MRR lost due to customers paying less in subscription costs than the previous month.
However, the difference is contraction MRR includes revenue lost from downgrades and cancellations.
How to Calculate Contraction MRR
To calculate contraction MRR, you’ll need downgrade MRR and churn MRR metrics handy.
Contraction MRR Formula
Downgrade MRR + Churn (or cancel) MRR
The calculation is as simple as adding the two MRR metrics together to get your contraction MRR.
For example, if you’re a SaaS business with a monthly premium subscription fee of $250, and you had one customer churn and three customers drop down to the basic $100 plan, then the calculation would look something like the below.
[3x$100] + $250
Your contraction MRR for that month would be $550.
What’s the Difference Between Downgrades & Cancellations?
Both downgrading and canceling subscriptions result in contraction MRR – or lost monthly revenue. However, as you can imagine, cancellations are much more detrimental to your business.
A cancellation means you have lost a customer and will need to work hard to earn them back. Downgrading means your customer has opted for a lesser-priced package or product, but they are still a customer generating revenue for your business.
When it comes to downgraded customers, there is a wealth of information you can gather.
It should be routine to ask customers who downgrade what their reason is. You’ll find that most often it is attributed to cost, in which case you can either adjust your prices or better educate your customers on the value that they are losing.
Maybe they are downgrading for budgetary reasons, or maybe they do not need the offerings provided by the more expensive tier. Regardless, this feedback will provide you with the information you need to (hopefully!) retain these customers.
Cancellations are much more concerning, and a harder pill to swallow.
Similar to downgrades, you should always find out the reason a customer chose to cancel their service. Sometimes you can re-engage canceled customers, but it does take extra work. Knowing the reason a customer chose to leave can help you reconnect with them.
Some of the reasons clients cancel include poor customer service, cost, they no longer need the product or service, or they decide to use your competition.
Read our glossary term on Revenue Churn to learn more about reducing churn.
Why Contraction MRR is Important
Contraction MRR is a key metric for your overall financial health. And we want your company to stay healthy!
Trends in your MRR can help you plan for the future and make adjustments where necessary. If your contraction MRR is high you will want to learn the reasons.
Monitoring your contraction MRR can help you figure out if your product or service is priced too high compared to the competition, if you’re not offering the value you believe that you are, or if you are not conveying the value you provide.
How to Reduce Contraction MRR
Reducing contraction MRR is tricky.
Your primary goal is to keep all of your customers, the secondary goal is to keep them at their current price point (or higher).
In other words, it is much less concerning for a customer to downgrade than it is for them to cancel – however both situations still mean a loss of revenue.
Ask Customers Why They’re Canceling or Downgrading
Both customers who downgrade, and those who cancel, should be asked for a reason upon leaving. This parting gift – so to speak – will help you understand the user journey. Once you gather enough information you can act accordingly.
Offer an Alternative Solution
Price is usually a top concern for people canceling a subscription. If you can’t persuade them of your value, you might consider offering a discount or educating them on your lesser-priced tiers.
As mentioned earlier, a downgrade is a loss, but not a total loss, and keeping them as a customer is most important. If they still insist on canceling, communicate with them!
Ask them if there is anything you can do on your end to be a better fit. Let them know you take their feedback seriously and site ways you hope to improve and meet their expectations.
Finally, don’t hesitate to reach out in the future; you never know when their budget and needs may align again with your service. This is all assuming the customer respects your brand.
A second, bigger concern, for cancellations, is due to the brand itself – be it a poor customer service experience or otherwise.
This is a more difficult correction. If enough people make complaints of this nature, some recalibration may be important for the future of your business. As tough as it is to hear negative feedback from customers, it is also incredibly valuable.
Track Contraction MRR with Finmark
While tracking metrics may just be another thing on your neverending to-do list, it’s important.
Tracking everything, from day one, helps to better forecast the future.
With Finmark, you can create and share financial plans, manage burn rate, track profit, and forecast revenue — all without pesky, templated spreadsheets.
Start your 30-day trial and say goodbye to confusing canned financial models and hello to accurate, customized financial models that truly reflect your business.
This content is presented “as is,” and is not intended to provide tax, legal or financial advice. Please consult your advisor with any questions.