Contraction MRR / Downgrade MRR
Definition
Downgrades and Contraction of MRR are reductions in Monthly recurring revenue during the month due to existing subscribers that now pay less than they did before, often due to a change of plan or removal of 1 subscription where they have multiple.
A high % of downgrades across an entire customer base can be an indicator that your existing customers are not receiving value from your product. And if it’s rising then you will need to take action by speaking to customers and / or providing them with another option at the point of cancellation.
How is Contraction MRR / Downgrade MRR calculated?
The formula for calculating Contraction MRR / Downgrade MRR is:Downgrade MRR (This Month) = Sum (MRR lost this month compared to last month from active subscribers of this month)
Example:
At the start of May you have an MRR of $5,000 and from the same customers you end may with an MRR of $4,000. This has seen an contraction in your MRR of 20%.
Your Downgrade / Contraction MRR is $1000.
Why is Contraction MRR / Downgrade MRR important to measure?
Downgrades are a common component in many metrics that investors pay a lot of attention to. If you’re looking for funding, having a low downgrade % will have a strong impact on your Net Revenue Retention rate, which is a key metric you’ll want to impress investors with.
What counts as a downgrade?
These items all count in the downgrade measure:
Customer moving from a higher price plan to a lower cost plan.
A forever discount applied to an existing plan that lowers the price.
