Contraction ARR
Growth
Industry:
SaaS
Short Definition
Contraction ARR represents the annual recurring revenue (ARR) lost from existing customers who reduce their subscription value within a specific period, without fully terminating their contracts.
It covers tier/plan downgrades (Down-sell), fewer seats/units or a lower committed minimum (the least they’re contractually obligated to pay each year), and price-only cuts/discounts, and is one of the key indicators of retention pressure and recurring revenue stability.
Short Definition
Contraction ARR represents the annual recurring revenue (ARR) lost from existing customers who reduce their subscription value within a specific period, without fully terminating their contracts.
It covers tier/plan downgrades (Down-sell), fewer seats/units or a lower committed minimum (the least they’re contractually obligated to pay each year), and price-only cuts/discounts, and is one of the key indicators of retention pressure and recurring revenue stability.
Short Definition
Contraction ARR represents the annual recurring revenue (ARR) lost from existing customers who reduce their subscription value within a specific period, without fully terminating their contracts.
It covers tier/plan downgrades (Down-sell), fewer seats/units or a lower committed minimum (the least they’re contractually obligated to pay each year), and price-only cuts/discounts, and is one of the key indicators of retention pressure and recurring revenue stability.
Why it matters for Investors
Retention health: Shows how much ARR you’re losing from customers who stay but pay less.
Profitability concern: Higher Contraction ARR reduces ARR and can pressure margins.
Growth balance: Stacking contraction against expansion reveals whether the base is net growing or shrinking
Why it matters for Investors
Retention health: Shows how much ARR you’re losing from customers who stay but pay less.
Profitability concern: Higher Contraction ARR reduces ARR and can pressure margins.
Growth balance: Stacking contraction against expansion reveals whether the base is net growing or shrinking
Why it matters for Investors
Retention health: Shows how much ARR you’re losing from customers who stay but pay less.
Profitability concern: Higher Contraction ARR reduces ARR and can pressure margins.
Growth balance: Stacking contraction against expansion reveals whether the base is net growing or shrinking
Formula
Practical considerations:
ARR scope: Count ARR lost from existing customers who stay but pay less—plan/tier downgrades (Down-sell) and fewer seats/units or a lower committed minimum, or a lower unit price/price-only cut (Reduction). Exclude logo churn (to $0) and one-off credits.
Timing: Record on the effective (go-live/start) date; signed-not-live sits in CARR until it starts.
Definition clarity: Standardize terms - Down-sell = move to a lower tier/remove a paid module; Reduction = lower quantity/minimum or lower unit price. “Existing customer” = active contract (not churned).
Reversals: If undone within the same period, net to $0; if undone later, record as Expansion (or an Adjustment if correcting a prior period).
Reporting cycle: Measure consistently (monthly/quarterly), aligned to effective dates.
Formula
Practical considerations:
ARR scope: Count ARR lost from existing customers who stay but pay less—plan/tier downgrades (Down-sell) and fewer seats/units or a lower committed minimum, or a lower unit price/price-only cut (Reduction). Exclude logo churn (to $0) and one-off credits.
Timing: Record on the effective (go-live/start) date; signed-not-live sits in CARR until it starts.
Definition clarity: Standardize terms - Down-sell = move to a lower tier/remove a paid module; Reduction = lower quantity/minimum or lower unit price. “Existing customer” = active contract (not churned).
Reversals: If undone within the same period, net to $0; if undone later, record as Expansion (or an Adjustment if correcting a prior period).
Reporting cycle: Measure consistently (monthly/quarterly), aligned to effective dates.
Formula
Practical considerations:
ARR scope: Count ARR lost from existing customers who stay but pay less—plan/tier downgrades (Down-sell) and fewer seats/units or a lower committed minimum, or a lower unit price/price-only cut (Reduction). Exclude logo churn (to $0) and one-off credits.
Timing: Record on the effective (go-live/start) date; signed-not-live sits in CARR until it starts.
Definition clarity: Standardize terms - Down-sell = move to a lower tier/remove a paid module; Reduction = lower quantity/minimum or lower unit price. “Existing customer” = active contract (not churned).
Reversals: If undone within the same period, net to $0; if undone later, record as Expansion (or an Adjustment if correcting a prior period).
Reporting cycle: Measure consistently (monthly/quarterly), aligned to effective dates.
Worked Example
Starting ARR (Jan 31): $1,200,000
Contract log (February):
Account | Event | Effective by Feb 28? | Account ARR @ Feb-28 ($) | Δ ARR in Feb ($) | Category | Notes |
|---|---|---|---|---|---|---|
A | Renewal $100,000 → $80,000 (tier downgrade) | Yes | $80,000 | -$20,000 | Contraction — Down-sell | Lower plan at renewal |
B | Seats cut 200 → 170 @ $150/seat/yr | Yes | $25,500 ($30,000 → $25,500) | -$4,500 | Contraction — Reduction (qty) | Fewer seats |
C | Price-only cut: 100 seats $120 → $110 | Yes | $11,000 ($12,000 → $11,000) | -$1,000 | Contraction — Reduction (price) | Same qty, lower unit price |
D | New logo $24,000, starts Feb 5 | Yes | $24,000 | +$24,000 | New Logo | Not Contraction |
E | Expansion +$15,000 on existing | Yes | $55,000 ($40,000 → $55,000) | +$15,000 | Expansion | Upsell/add-on |
F | Churn: $30,000 → $0 (Feb 28) | Yes | $0 | -$30,000 | Churn (Logo Churn) | Logo to $0 |
G | Signed reduction $12,000, starts Mar 1 | No | $0 | $0 | Booking / CARR | Signed, not effective → March |
Contraction ARR (February): $25,500 = $20,000 (A) + $4,500 (B) + $1,000 (C)
ARR Bridge (February):
New Logo ARR: +$24,000 (D)
Expansion ARR: +$15,000 (E)
Contraction ARR: −$25,500 (A + B + C)
Logo Churn ARR: −$30,000 (F)
Net New ARR: $24,000 + $15,000 − $25,500 − $30,000 = −$16,500
Ending ARR (Feb 28): $1,200,000 − $16,500 = $1,183,500
Notes:
Contraction includes down-sells (feature/tier drop) and reductions (fewer units/minimum or price-only cuts).
Signed-not-live changes sit in CARR and don’t affect ARR until the effective date.
Logo Churn (to $0) is not Contraction; it’s reported separately in the bridge.
Worked Example
Starting ARR (Jan 31): $1,200,000
Contract log (February):
Account | Event | Effective by Feb 28? | Account ARR @ Feb-28 ($) | Δ ARR in Feb ($) | Category | Notes |
|---|---|---|---|---|---|---|
A | Renewal $100,000 → $80,000 (tier downgrade) | Yes | $80,000 | -$20,000 | Contraction — Down-sell | Lower plan at renewal |
B | Seats cut 200 → 170 @ $150/seat/yr | Yes | $25,500 ($30,000 → $25,500) | -$4,500 | Contraction — Reduction (qty) | Fewer seats |
C | Price-only cut: 100 seats $120 → $110 | Yes | $11,000 ($12,000 → $11,000) | -$1,000 | Contraction — Reduction (price) | Same qty, lower unit price |
D | New logo $24,000, starts Feb 5 | Yes | $24,000 | +$24,000 | New Logo | Not Contraction |
E | Expansion +$15,000 on existing | Yes | $55,000 ($40,000 → $55,000) | +$15,000 | Expansion | Upsell/add-on |
F | Churn: $30,000 → $0 (Feb 28) | Yes | $0 | -$30,000 | Churn (Logo Churn) | Logo to $0 |
G | Signed reduction $12,000, starts Mar 1 | No | $0 | $0 | Booking / CARR | Signed, not effective → March |
Contraction ARR (February): $25,500 = $20,000 (A) + $4,500 (B) + $1,000 (C)
ARR Bridge (February):
New Logo ARR: +$24,000 (D)
Expansion ARR: +$15,000 (E)
Contraction ARR: −$25,500 (A + B + C)
Logo Churn ARR: −$30,000 (F)
Net New ARR: $24,000 + $15,000 − $25,500 − $30,000 = −$16,500
Ending ARR (Feb 28): $1,200,000 − $16,500 = $1,183,500
Notes:
Contraction includes down-sells (feature/tier drop) and reductions (fewer units/minimum or price-only cuts).
Signed-not-live changes sit in CARR and don’t affect ARR until the effective date.
Logo Churn (to $0) is not Contraction; it’s reported separately in the bridge.
Worked Example
Starting ARR (Jan 31): $1,200,000
Contract log (February):
Account | Event | Effective by Feb 28? | Account ARR @ Feb-28 ($) | Δ ARR in Feb ($) | Category | Notes |
|---|---|---|---|---|---|---|
A | Renewal $100,000 → $80,000 (tier downgrade) | Yes | $80,000 | -$20,000 | Contraction — Down-sell | Lower plan at renewal |
B | Seats cut 200 → 170 @ $150/seat/yr | Yes | $25,500 ($30,000 → $25,500) | -$4,500 | Contraction — Reduction (qty) | Fewer seats |
C | Price-only cut: 100 seats $120 → $110 | Yes | $11,000 ($12,000 → $11,000) | -$1,000 | Contraction — Reduction (price) | Same qty, lower unit price |
D | New logo $24,000, starts Feb 5 | Yes | $24,000 | +$24,000 | New Logo | Not Contraction |
E | Expansion +$15,000 on existing | Yes | $55,000 ($40,000 → $55,000) | +$15,000 | Expansion | Upsell/add-on |
F | Churn: $30,000 → $0 (Feb 28) | Yes | $0 | -$30,000 | Churn (Logo Churn) | Logo to $0 |
G | Signed reduction $12,000, starts Mar 1 | No | $0 | $0 | Booking / CARR | Signed, not effective → March |
Contraction ARR (February): $25,500 = $20,000 (A) + $4,500 (B) + $1,000 (C)
ARR Bridge (February):
New Logo ARR: +$24,000 (D)
Expansion ARR: +$15,000 (E)
Contraction ARR: −$25,500 (A + B + C)
Logo Churn ARR: −$30,000 (F)
Net New ARR: $24,000 + $15,000 − $25,500 − $30,000 = −$16,500
Ending ARR (Feb 28): $1,200,000 − $16,500 = $1,183,500
Notes:
Contraction includes down-sells (feature/tier drop) and reductions (fewer units/minimum or price-only cuts).
Signed-not-live changes sit in CARR and don’t affect ARR until the effective date.
Logo Churn (to $0) is not Contraction; it’s reported separately in the bridge.
Best Practices
Accurate tracking: Use billing/subscription systems and CRM to monitor contraction events effective in the period (down-sells and reductions, including price-only cuts); reconcile to your ARR change log.
Regular updates: Recalculate Contraction ARR every reporting period; capture effective-date changes and any reversals.
Segmentation: Analyze by customer segment, product tier, or contraction reason to identify trends.
Retention strategy: Use Contraction ARR to address customer downgrades and optimize pricing.
Best Practices
Accurate tracking: Use billing/subscription systems and CRM to monitor contraction events effective in the period (down-sells and reductions, including price-only cuts); reconcile to your ARR change log.
Regular updates: Recalculate Contraction ARR every reporting period; capture effective-date changes and any reversals.
Segmentation: Analyze by customer segment, product tier, or contraction reason to identify trends.
Retention strategy: Use Contraction ARR to address customer downgrades and optimize pricing.
Best Practices
Accurate tracking: Use billing/subscription systems and CRM to monitor contraction events effective in the period (down-sells and reductions, including price-only cuts); reconcile to your ARR change log.
Regular updates: Recalculate Contraction ARR every reporting period; capture effective-date changes and any reversals.
Segmentation: Analyze by customer segment, product tier, or contraction reason to identify trends.
Retention strategy: Use Contraction ARR to address customer downgrades and optimize pricing.
FAQs
What is included in Contraction ARR?
ARR lost from existing customers who stay but pay less—down-sell (lower tier/remove a paid module) and reductions (fewer seats/units or a lower committed minimum, or price-only decreases)—counted when effective (goes live/start date).Can Contraction ARR increase?
Yes—if more/larger downgrades, quantity/minimum cuts, or price-only decreases take effect in the period.How is logo churn handled?
It is excluded from Contraction ARR. Logo churn = customer goes to $0 and is reported separately as Logo Churn ARR.Is it the same as Down-sell ARR?
No. Down-sell = tier/plan downgrade or removing a paid module. Contraction ARR = Down-sell ARR + Reduction ARR.What if a reduction is reversed?
If reversed within the same period, net to $0. If reversed after period close, record Expansion in the later period (or an Adjustment if correcting a prior period).
FAQs
What is included in Contraction ARR?
ARR lost from existing customers who stay but pay less—down-sell (lower tier/remove a paid module) and reductions (fewer seats/units or a lower committed minimum, or price-only decreases)—counted when effective (goes live/start date).Can Contraction ARR increase?
Yes—if more/larger downgrades, quantity/minimum cuts, or price-only decreases take effect in the period.How is logo churn handled?
It is excluded from Contraction ARR. Logo churn = customer goes to $0 and is reported separately as Logo Churn ARR.Is it the same as Down-sell ARR?
No. Down-sell = tier/plan downgrade or removing a paid module. Contraction ARR = Down-sell ARR + Reduction ARR.What if a reduction is reversed?
If reversed within the same period, net to $0. If reversed after period close, record Expansion in the later period (or an Adjustment if correcting a prior period).
FAQs
What is included in Contraction ARR?
ARR lost from existing customers who stay but pay less—down-sell (lower tier/remove a paid module) and reductions (fewer seats/units or a lower committed minimum, or price-only decreases)—counted when effective (goes live/start date).Can Contraction ARR increase?
Yes—if more/larger downgrades, quantity/minimum cuts, or price-only decreases take effect in the period.How is logo churn handled?
It is excluded from Contraction ARR. Logo churn = customer goes to $0 and is reported separately as Logo Churn ARR.Is it the same as Down-sell ARR?
No. Down-sell = tier/plan downgrade or removing a paid module. Contraction ARR = Down-sell ARR + Reduction ARR.What if a reduction is reversed?
If reversed within the same period, net to $0. If reversed after period close, record Expansion in the later period (or an Adjustment if correcting a prior period).
Related Metrics
Commonly mistaken for:
Logo Churn ARR (ARR from full terminations, not reductions)
Expansion ARR (Increases within the installed base, not contractions)
Related Metrics
Commonly mistaken for:
Logo Churn ARR (ARR from full terminations, not reductions)
Expansion ARR (Increases within the installed base, not contractions)
Related Metrics
Commonly mistaken for:
Logo Churn ARR (ARR from full terminations, not reductions)
Expansion ARR (Increases within the installed base, not contractions)
Source of:
Components:
Index