Recurring revenue lost when existing customers downgrade, remove seats, or drop add-ons without cancelling entirely.
Contraction MRR = Σ MRR reductions from existing customers (downgrades + seat reductions + dropped add-ons) in period
In a month, 6 customers downgrade losing £40/mo each, and 3 reduce seats worth £30/mo each — none cancel.
(6 × £40) + (3 × £30) = £240 + £90 = £330 contraction MRR
Contraction MRR is the revenue you lose from customers who stay but spend less. It captures downgrades to a cheaper tier, reductions in seat count, dropped add-ons, and the expiry of discounts in reverse — anything that lowers an existing customer's recurring spend short of a full cancellation. Crucially, the customer remains; only their MRR shrinks.
It is the mirror image of expansion MRR and the quieter sibling of churn. Where churn removes a logo entirely, contraction trims revenue from accounts you keep — which makes it easy to overlook. A book of customers that all downgrade slightly can bleed as much MRR as a few outright cancellations, without a single logo lost.
Contraction is a core input to your retention metrics. It sits in the denominator-shrinking half of net revenue retention and revenue churn, dragging both down. Watching it separately from churn helps you tell apart two different problems: customers leaving versus customers quietly buying less.
Contraction is churn in disguise: it erodes revenue from customers you have kept, so it never shows up as a lost logo and is easy to miss. Tracking it separately tells you whether your retention problem is people leaving or people downgrading — two issues with very different fixes.
Best-in-class SaaS keep contraction low enough that, with expansion, net revenue retention stays above 100%. Rising contraction is an early warning that pricing, value delivery, or product fit is slipping for existing accounts.
Contraction is revenue lost from customers who downgrade but stay; churn is revenue lost when a customer cancels entirely. Contraction shrinks an account, churn removes it.
Contraction drags NRR down. It is subtracted alongside churn before expansion is added, so heavy contraction can pull NRR below 100% even when you are signing upgrades.
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