Losing customers is a tough blow, but more often than not, your customers may be open to a lower subscription cost than saying goodbye altogether.
That reduction in subscription revenue is called downgrade MRR.
In this post, we’ll review downgrade MRR in detail, including how to calculate it, why it’s important, and how to keep your customers happy and decrease revenue lost from downgrades.
What is Downgrade MRR?
Downgrade MRR is the amount of monthly recurring revenue (MRR) lost due to customers paying less in subscription costs than the previous month.
What causes downgrade MRR? Some common culprits include:
- Customers opting to move to a lower-tiered pricing plan (especially during annual contract reviews)
- Customers reducing the number of seats for the product or service
- Customers cancelling add-on offerings due to a lack of need/interest or due to a price increase
In short, the revenue lost during a reduction in subscription should be classified as downgrade MRR. Not all startups track downgrade MRR, however it’s an important metric to keep track of to understand the trends in downgrades and what you can do to keep your customers happy.
Note: this is different from revenue or MRR churn — revenue lost due to downgrades and cancellations. You don’t account for cancellations within downgrade MRR, only reductions in subscriptions.
Read our glossary term on Revenue Churn to learn more about reducing churn.
How To Calculate Downgrade MRR
To calculate downgrade MRR, you’ll need to understand MRR prior to the downgrade. You subtract the MRR following the downgrade from the MRR prior to the downgrade. Simple enough!
To calculate downgrade MRR across your customer base, then you simply take the sum of all downgrades from active subscriptions during that month.
Downgrade MRR Formula
MRR prior to the downgrade – MRR following the downgrade
For example, if a customer has moved from your premium plan ($600 MRR) to your basic plan ($150 MRR), then downgrade MRR would be $450.
If three customers dropped from premium to basic in a month, then your total downgrade MRR for that month would be $1,350 (1800-450).
Why Downgrade MRR is Important
While churned customers may significantly hurt your bottom line, unfortunately downgrade MRR can make an impact, too, as seen with the above example.
If you are consistently tracking your downgrade MRR, then you can spot trends in downgrades and adjust strategies accordingly.
For example, if your downgrade MRR spikes after a price increase, then you may want to work on communicating to your customers on why there was an increase and the benefits they receive by staying at the same subscription level.
Or, if you have noticed that downgrades happen more frequently at the end of the year, then you may want to offer discounts or other incentives to ensure customers are happy at their current tier versus downgrading.
Downgrades are inevitable, but keeping track of your downgrade MRR means that you can have a better handle on your runway and future growth.
How to Decrease Downgrade MRR
Reducing downgrade MRR begins and ends with happy customers. If you provide an amazing end-to-end customer experience, then you’ll ideally have fewer downgrades over time.
There are a variety of ways to keep your customers happy and decrease downgrade MRR.
1. Invest in Customer Service & Customer Success
Are your customers left without a paddle once they sign on the dotted line? Do they have to call or email 3-4 times before getting a response? These could be some of the reasons why a customer is opting to downgrade their subscription.
Investing in both customer service and customer success teams can help to minimize downgrades. A friendly face and a helping hand can be the difference between a customer maintaining their subscription and downgrading to a basic plan.
2. Communicate Your Value
You know the in’s and out’s of your product, but do your customers? Ensure you are consistently communicating the value of your product or service.
Have metrics and case studies on-hand for a customer thinking of downgrading or canceling to clearly communicate the value of what you are providing. When a customer wants to downgrade, remind them why they signed up for your product or service in the first place!
3. Let Them Know What They’ll Lose
On a similar note, whenever a customer is about to downgrade, make it clear what they stand to lose by switching plans. If one of the features they’ll lose access to is something they use often, it could be enough to incentivize them to stick with their current plan.
4. Provide Incentives & Discounts
We know, offering discounts and incentives sounds counterintuitive to increasing revenue.
However, offering a one-time discount or incentive will make less of an impact on your MRR than a customer opting to downgrade their subscription. This could be in the form of a free month of a new add-on for them to try, a discounted subscription if they are thinking about downgrading, or a complimentary ticket to your annual user conference.
5. Create a Community
Having a place where customers can interact with each other, whether that is an online forum, monthly meetup or annual user conference, can help with customer satisfaction and therefore prevent downgrades.
Creating a community will bring your customers together to discuss your product and service, providing a place for them to learn more and develop a rapport with other users.
Less Downgrades, More Upgrades
Downgrade MRR may not be your North Star, but it is yet another metric to help you better understand how to stay in the black.
Keep your customers happy and you’ll see your downgrade MRR reduce over time. Less downgrades, more upgrades!
This content is presented “as is,” and is not intended to provide tax, legal or financial advice. Please consult your advisor with any questions.