What is Contraction MRR?

You spend countless hours refining your pitch and product to acquire customers. Seeing the revenue numbers go up is the primary validation for that work. However, growth is rarely a straight line up and to the right.

Sometimes a customer decides they no longer need the premium features. Or perhaps they need fewer seats than they bought last month. They do not leave your service entirely, but they pay you less than they did before.

This specific drop in revenue is known as Contraction MRR.

It is the measure of Monthly Recurring Revenue (MRR) lost from existing customers due to downgrades. It is a critical metric for any subscription business because it acts as a drag on your growth. You have to add new revenue just to fill the hole left by contraction before you can actually grow.

Contraction MRR is distinct from churn. When a customer churns, they cancel their subscription entirely and the revenue drops to zero. With contraction, the relationship continues, but the financial value decreases.

This usually happens in a few specific ways:

• Downgrading tiers: A user moves from a Gold plan to a Silver plan.
• Reducing seats: A company lays off staff or consolidates roles and drops 5 user licenses.
• Removing add-ons: A customer cancels a specific module or extra service they were paying for.
• Discounting: You offer a discount to a customer to prevent them from cancelling entirely.

To calculate it, you simply sum up the total revenue decrease from all existing customers within a specific month. If five customers downgrade by $100 each, your Contraction MRR is $500.

Contraction is a major component of your Net New MRR equation. The formula generally looks like this:

New MRR + Expansion MRR - Churn MRR - Contraction MRR = Net New MRR

If your contraction is high, your sales team has to work significantly harder just to maintain a flat revenue line. It indicates a leaky bucket.

This metric forces you to ask difficult questions about product-market fit. Are you overselling features that customers do not actually use? Is your pricing model aligned with the value you deliver?

High contraction often signals that customers feel they are paying for bloat. They like the core product enough to stay, but they do not see the value in the higher tiers.

While losing revenue is never ideal, contraction is preferable to churn. Contraction means you still have a chance. The customer is still using the product. They are still logging in.

This gives you an opportunity to re-engage. You can learn why they downgraded. Was it budget cuts on their end? Was it a lack of feature adoption?

In some scenarios, contraction is actually a sign of a healthy, flexible pricing model. It allows customers to scale down during tough times rather than forcing them to cancel because the cost became prohibited. It preserves the logo even if the dollar amount drops.

Founders should track this metric separately from churn to diagnose specific health issues in the business. If contraction spikes, look at your recent product changes or pricing updates.

Did you recently raise prices on legacy customers? That often triggers a review of usage where customers realize they can survive on a cheaper plan.

Ultimately, zero contraction is unlikely. Business needs fluctuate. However, keeping this number low is essential for capital efficient growth. It ensures that the hard work of acquiring a customer pays off over the long term.