Contraction Rate
The percentage of existing recurring revenue lost to customer downgrades in a given period. Measures the revenue impact of customers reducing their usage or plan level.
Formula
(MRR Lost to Downgrades / Starting MRR) x 100
Why contraction rate matters
Contraction is a warning signal that often precedes churn. Customers who downgrade may be getting less value from your product, and many will eventually leave entirely.
Tracking contraction separately from churn reveals important nuances. High contraction with low churn might mean your pricing tiers are poorly structured. High contraction in a specific segment might signal a competitive threat.
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How to calculate contraction rate
Divide the MRR lost from plan downgrades and seat removals by the total MRR at the start of the period.
Contraction Rate Calculator
(MRR Lost to Downgrades / Starting MRR) x 100
Common Mistakes
- -Lumping contraction with churn in reporting - they have different causes and solutions
- -Not investigating why customers downgrade - the reasons inform product and pricing decisions
- -Ignoring contraction because overall revenue is still growing
Pro Tips
- +Survey customers at the point of downgrade to understand their reasons
- +Track whether downgraded accounts eventually churn at higher rates
- +Analyze if contraction correlates with specific events like price increases or feature changes
Related Terms
Churn Rate
The percentage of customers or revenue lost over a given period. Customer churn measures account losses; revenue churn measures dollar losses.
Dollar Churn
The percentage of recurring revenue lost from cancellations and downgrades in a given period. Measures the financial impact of customer losses.
Net Dollar Retention (NDR)
The percentage of recurring revenue retained from existing customers after accounting for expansion, contraction, and churn. Above 100% means existing customers generate more revenue over time.
Expansion Revenue
Expansion revenue is additional recurring revenue generated from existing customers through upsells, cross-sells, seat additions, or increased usage. It is the primary driver of net revenue retention above 100%.
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