Here Is Everything You Need To Know About Contraction MRR

What Is Contraction MRR?

Contraction monthly recurring revenue (MRR) helps SaaS companies track how many businesses have downgraded their subscription plans and how many have cancelled their subscriptions. Using the contraction MRR metric, SaaS companies can identify revenue losses and understand why their B2B partners spend less on their SaaS offerings. 

After discovering the root causes, SaaS companies can make suitable changes to their products and operations to arrest the pace of contraction MRR and prevent revenue loss.

The Difference Between Downgrade and Cancellation

SaaS players typically offer three service levels – basic, standard and premium – to onboard new companies and retain existing ones. Except for basic, the two other levels offer exclusive feature upgrades so that businesses can add value and stay competitive without hassles.

When a business opts for a downgrade, it switches to a lower-priced subscription plan with fewer features (say, from premium to standard or basic), leading to a drop in the SaaS revenue. However, this may ensure customer retention for a longer period and enhance customer loyalty.

On the other hand, cancellation means subscription discontinuity, at least for the time being. It is undoubtedly less lucrative than downgrading as downgraded plans continue to generate revenue and businesses still stick to their SaaS providers instead of leaving them. Therefore, offering a wide range of subscription models to suit every pocket is essential to customer satisfaction and ease of retention.

What’s The Formula To Calculate Contraction MRR

Contraction MRR is a metric that measures a SaaS company’s loss of monthly recurring revenue due to downgrades and subscription cancellations. Here is how one calculates the contraction MRR of the SaaS company X.

Consider this. X lost INR 3 Lakh in subscription cancellations and INR 1.5 Lakh due to downgrades in the month just concluded. In this case:

Contraction MRR for the given month = Loss of MRR from cancellations + loss of MRR from downgrades = INR 3 Lakh + INR 1.5 Lakh = INR 4.5 Lakh.

After calculating the revenue dip, X can take measures to ensure financial stability and customer retention.

Four Tips To Prevent Contraction MRR

To minimise contraction MRR, the goal is to retain all customers at current or higher subscription levels. Here are four growth tips to reduce contraction and improve SaaS revenue:

• Get feedback and data-driven insights to understand why your B2B customers are downgrading or cancelling subscriptions. This will help you make informed modifications, improve offerings and enhance customer journeys.
• Prevent cancellations due to pricing by offering effective alternatives such as discounts or educating customers about low-priced options.
• Stay engaged to enhance customer experience as disconnects often lead to service downgrades or cancellations.
• Keep in touch with former customers. This may help SaaS players cater to those businesses again when the situation changes and align with their future requirements. However, maintaining brand respect is crucial for successful re-engagement.