Reduction ARR
Growth
Industry:
SaaS
Aliases:
Short Definition
Reduction ARR is the ARR lost when an existing customer stays but uses less or pays less—for example, they cut seats/users/units, lower a committed minimum (the least they promise to pay each year), or get a price-only decrease—without ending the contract. Count it on the effective (go-live) date, not when it’s signed.
Short Definition
Reduction ARR is the ARR lost when an existing customer stays but uses less or pays less—for example, they cut seats/users/units, lower a committed minimum (the least they promise to pay each year), or get a price-only decrease—without ending the contract. Count it on the effective (go-live) date, not when it’s signed.
Short Definition
Reduction ARR is the ARR lost when an existing customer stays but uses less or pays less—for example, they cut seats/users/units, lower a committed minimum (the least they promise to pay each year), or get a price-only decrease—without ending the contract. Count it on the effective (go-live) date, not when it’s signed.
Why it matters for Investors
Retention insight: Shows how much ARR is leaking from customers who remain but pay less.
Profitability impact: Lower ARR with largely fixed costs can squeeze margins.
Usage trends: Highlights declining usage or weaker product fit.
Why it matters for Investors
Retention insight: Shows how much ARR is leaking from customers who remain but pay less.
Profitability impact: Lower ARR with largely fixed costs can squeeze margins.
Usage trends: Highlights declining usage or weaker product fit.
Why it matters for Investors
Retention insight: Shows how much ARR is leaking from customers who remain but pay less.
Profitability impact: Lower ARR with largely fixed costs can squeeze margins.
Usage trends: Highlights declining usage or weaker product fit.
Formula
Practical considerations:
Scope: Existing customers only. Include seat/unit cuts, lower minimums, and price-only decreases. Exclude tier/plan downgrades (that’s Down-sell ARR) and customers going to $0 (that’s Logo Churn ARR).
Timing: Record on the effective date; signed-not-live sits in CARR until it starts.
Split mixed changes: If a change includes both a feature downgrade and fewer seats/price cuts, split once: feature drop → Down-sell; seats/minimum/price → Reduction.
Reversals: If reversed in the same period, net to $0; if reversed later, book as Expansion.
Formula
Practical considerations:
Scope: Existing customers only. Include seat/unit cuts, lower minimums, and price-only decreases. Exclude tier/plan downgrades (that’s Down-sell ARR) and customers going to $0 (that’s Logo Churn ARR).
Timing: Record on the effective date; signed-not-live sits in CARR until it starts.
Split mixed changes: If a change includes both a feature downgrade and fewer seats/price cuts, split once: feature drop → Down-sell; seats/minimum/price → Reduction.
Reversals: If reversed in the same period, net to $0; if reversed later, book as Expansion.
Formula
Practical considerations:
Scope: Existing customers only. Include seat/unit cuts, lower minimums, and price-only decreases. Exclude tier/plan downgrades (that’s Down-sell ARR) and customers going to $0 (that’s Logo Churn ARR).
Timing: Record on the effective date; signed-not-live sits in CARR until it starts.
Split mixed changes: If a change includes both a feature downgrade and fewer seats/price cuts, split once: feature drop → Down-sell; seats/minimum/price → Reduction.
Reversals: If reversed in the same period, net to $0; if reversed later, book as Expansion.
Worked Example
Starting ARR (Feb 28): $1,200,000
Period: March (snapshot Mar 31)
Account | Event | Effective by Mar 31? | Account ARR @ Mar-31 ($) | Δ ARR in March ($) | Category | Notes |
|---|---|---|---|---|---|---|
A | New logo, annual $24,000, starts Mar 4 | Yes | $24,000 | +$24,000 | New Logo | Not Reduction |
B | New logo, annual $36,000, starts Apr 1 | No | $0 | $0 | Booking / CARR | Signed, starts next month |
C | Upsell on existing (+$18,000) eff. Mar 15 (prior $50,000) | Yes | $68,000 ($50,000 → $68,000) | +$18,000 | Expansion | Not Reduction |
D | Cancellation effective Mar 31 (prior $40,000) | Yes | $0 | −$40,000 | Churn | Not Reduction, this is Logo Churn |
E | Year-2 ramp $20,000 → $35,000 on Mar 1 | Yes | $35,000 | +$15,000 | Expansion (ramp) | Not Reduction |
H | Seats cut 200 → 170 @ $150/seat/yr | Yes | $25,500 ($30,000 → $25,500) | −$4,500 | Contraction — Reduction | Fewer seats |
I | Price-only cut: 100 seats $120 → $110 | Yes | $11,000 ($12,000 → $11,000) | −$1,000 | Contraction — Reduction (price) | Same qty, lower unit price |
J | Committed minimum reduced: $50,000 → $41,500 | Yes | $41,500 | −$8,500 | Contraction — Reduction (minimum) | Lower annual minimum |
Reduction ARR (March): $14,000 = $4,500 (H) + $1,000 (I) + $8,500 (J)
ARR Bridge (March):
New Logo ARR: +$24,000 (A)
Expansion ARR: +$33,000 (C + E)
Contraction ARR (Reduction): −$14,000 (H + I + J)
Logo Churn ARR: −$40,000 (D)
Net New ARR: +$3,000
Ending ARR (Mar 31): $1,200,000 + $3,000 = $1,203,000
Notes:
Reduction ARR only counts seats/units/minimum/price decreases from customers who remain active.
Tier/plan downgrades are Down-sell ARR (not Reduction).
Signed-for-later changes stay in CARR until their start date.
If a single change includes both a feature downgrade and seat/price cuts, split once between Down-sell and Reduction.
Worked Example
Starting ARR (Feb 28): $1,200,000
Period: March (snapshot Mar 31)
Account | Event | Effective by Mar 31? | Account ARR @ Mar-31 ($) | Δ ARR in March ($) | Category | Notes |
|---|---|---|---|---|---|---|
A | New logo, annual $24,000, starts Mar 4 | Yes | $24,000 | +$24,000 | New Logo | Not Reduction |
B | New logo, annual $36,000, starts Apr 1 | No | $0 | $0 | Booking / CARR | Signed, starts next month |
C | Upsell on existing (+$18,000) eff. Mar 15 (prior $50,000) | Yes | $68,000 ($50,000 → $68,000) | +$18,000 | Expansion | Not Reduction |
D | Cancellation effective Mar 31 (prior $40,000) | Yes | $0 | −$40,000 | Churn | Not Reduction, this is Logo Churn |
E | Year-2 ramp $20,000 → $35,000 on Mar 1 | Yes | $35,000 | +$15,000 | Expansion (ramp) | Not Reduction |
H | Seats cut 200 → 170 @ $150/seat/yr | Yes | $25,500 ($30,000 → $25,500) | −$4,500 | Contraction — Reduction | Fewer seats |
I | Price-only cut: 100 seats $120 → $110 | Yes | $11,000 ($12,000 → $11,000) | −$1,000 | Contraction — Reduction (price) | Same qty, lower unit price |
J | Committed minimum reduced: $50,000 → $41,500 | Yes | $41,500 | −$8,500 | Contraction — Reduction (minimum) | Lower annual minimum |
Reduction ARR (March): $14,000 = $4,500 (H) + $1,000 (I) + $8,500 (J)
ARR Bridge (March):
New Logo ARR: +$24,000 (A)
Expansion ARR: +$33,000 (C + E)
Contraction ARR (Reduction): −$14,000 (H + I + J)
Logo Churn ARR: −$40,000 (D)
Net New ARR: +$3,000
Ending ARR (Mar 31): $1,200,000 + $3,000 = $1,203,000
Notes:
Reduction ARR only counts seats/units/minimum/price decreases from customers who remain active.
Tier/plan downgrades are Down-sell ARR (not Reduction).
Signed-for-later changes stay in CARR until their start date.
If a single change includes both a feature downgrade and seat/price cuts, split once between Down-sell and Reduction.
Worked Example
Starting ARR (Feb 28): $1,200,000
Period: March (snapshot Mar 31)
Account | Event | Effective by Mar 31? | Account ARR @ Mar-31 ($) | Δ ARR in March ($) | Category | Notes |
|---|---|---|---|---|---|---|
A | New logo, annual $24,000, starts Mar 4 | Yes | $24,000 | +$24,000 | New Logo | Not Reduction |
B | New logo, annual $36,000, starts Apr 1 | No | $0 | $0 | Booking / CARR | Signed, starts next month |
C | Upsell on existing (+$18,000) eff. Mar 15 (prior $50,000) | Yes | $68,000 ($50,000 → $68,000) | +$18,000 | Expansion | Not Reduction |
D | Cancellation effective Mar 31 (prior $40,000) | Yes | $0 | −$40,000 | Churn | Not Reduction, this is Logo Churn |
E | Year-2 ramp $20,000 → $35,000 on Mar 1 | Yes | $35,000 | +$15,000 | Expansion (ramp) | Not Reduction |
H | Seats cut 200 → 170 @ $150/seat/yr | Yes | $25,500 ($30,000 → $25,500) | −$4,500 | Contraction — Reduction | Fewer seats |
I | Price-only cut: 100 seats $120 → $110 | Yes | $11,000 ($12,000 → $11,000) | −$1,000 | Contraction — Reduction (price) | Same qty, lower unit price |
J | Committed minimum reduced: $50,000 → $41,500 | Yes | $41,500 | −$8,500 | Contraction — Reduction (minimum) | Lower annual minimum |
Reduction ARR (March): $14,000 = $4,500 (H) + $1,000 (I) + $8,500 (J)
ARR Bridge (March):
New Logo ARR: +$24,000 (A)
Expansion ARR: +$33,000 (C + E)
Contraction ARR (Reduction): −$14,000 (H + I + J)
Logo Churn ARR: −$40,000 (D)
Net New ARR: +$3,000
Ending ARR (Mar 31): $1,200,000 + $3,000 = $1,203,000
Notes:
Reduction ARR only counts seats/units/minimum/price decreases from customers who remain active.
Tier/plan downgrades are Down-sell ARR (not Reduction).
Signed-for-later changes stay in CARR until their start date.
If a single change includes both a feature downgrade and seat/price cuts, split once between Down-sell and Reduction.
Best Practices
Set simple alerts: Flag accounts where seats/usage drop by a clear threshold (e.g., 10–20% week-over-week) so Customer Success can reach out early.
Tag short reason codes: For every reduction, pick one clear reason (budget, low usage, price, product gap). Review the top 3 monthly.
Look by cohort & plan: Track reductions by customer age (0–3 months, 3–12 months, 12 months+) and by plan/module to spot where reductions cluster.
Have a save play: When a reduction request comes in, try right-sizing plans, training to boost adoption, or time-boxed discounts—document the outcome.
Tidy pricing & minimums: Use a minimum-commit “floor” and avoid permanent price cuts; prefer temporary credits with an end date.
Keep a pending list: Maintain a simple list of upcoming, signed reductions with effective dates; reconcile this to the ARR bridge at month-end.
QA the data: Sample a few reductions each month—match invoices to contract amendments—and check that mixed changes were split once (feature drop vs. seats/price).
Best Practices
Set simple alerts: Flag accounts where seats/usage drop by a clear threshold (e.g., 10–20% week-over-week) so Customer Success can reach out early.
Tag short reason codes: For every reduction, pick one clear reason (budget, low usage, price, product gap). Review the top 3 monthly.
Look by cohort & plan: Track reductions by customer age (0–3 months, 3–12 months, 12 months+) and by plan/module to spot where reductions cluster.
Have a save play: When a reduction request comes in, try right-sizing plans, training to boost adoption, or time-boxed discounts—document the outcome.
Tidy pricing & minimums: Use a minimum-commit “floor” and avoid permanent price cuts; prefer temporary credits with an end date.
Keep a pending list: Maintain a simple list of upcoming, signed reductions with effective dates; reconcile this to the ARR bridge at month-end.
QA the data: Sample a few reductions each month—match invoices to contract amendments—and check that mixed changes were split once (feature drop vs. seats/price).
Best Practices
Set simple alerts: Flag accounts where seats/usage drop by a clear threshold (e.g., 10–20% week-over-week) so Customer Success can reach out early.
Tag short reason codes: For every reduction, pick one clear reason (budget, low usage, price, product gap). Review the top 3 monthly.
Look by cohort & plan: Track reductions by customer age (0–3 months, 3–12 months, 12 months+) and by plan/module to spot where reductions cluster.
Have a save play: When a reduction request comes in, try right-sizing plans, training to boost adoption, or time-boxed discounts—document the outcome.
Tidy pricing & minimums: Use a minimum-commit “floor” and avoid permanent price cuts; prefer temporary credits with an end date.
Keep a pending list: Maintain a simple list of upcoming, signed reductions with effective dates; reconcile this to the ARR bridge at month-end.
QA the data: Sample a few reductions each month—match invoices to contract amendments—and check that mixed changes were split once (feature drop vs. seats/price).
FAQs
What is included in Reduction ARR?
Fewer seats/users/units, a lower committed minimum, or a price-only decrease that started this period.Is Reduction ARR the same as Contraction ARR?
No, Reduction ARR is a component of Contraction ARR, which also includes Down-sell ARR.Does a tier/plan downgrade count here?
No. That’s Down-sell ARR (feature scope decreased).Do price-only decreases count?
Yes—those are Reduction ARR (price).What if a reduction is reversed?
If reversed in the same period, net to $0; if later, record as Expansion.
FAQs
What is included in Reduction ARR?
Fewer seats/users/units, a lower committed minimum, or a price-only decrease that started this period.Is Reduction ARR the same as Contraction ARR?
No, Reduction ARR is a component of Contraction ARR, which also includes Down-sell ARR.Does a tier/plan downgrade count here?
No. That’s Down-sell ARR (feature scope decreased).Do price-only decreases count?
Yes—those are Reduction ARR (price).What if a reduction is reversed?
If reversed in the same period, net to $0; if later, record as Expansion.
FAQs
What is included in Reduction ARR?
Fewer seats/users/units, a lower committed minimum, or a price-only decrease that started this period.Is Reduction ARR the same as Contraction ARR?
No, Reduction ARR is a component of Contraction ARR, which also includes Down-sell ARR.Does a tier/plan downgrade count here?
No. That’s Down-sell ARR (feature scope decreased).Do price-only decreases count?
Yes—those are Reduction ARR (price).What if a reduction is reversed?
If reversed in the same period, net to $0; if later, record as Expansion.
Related Metrics
Source metrics: Contraction ARR
Commonly mistaken for:
Down-sell ARR (tier/plan downgrade or removing a paid module (feature change), not fewer seats or price-only cuts)
Logo Churn ARR (customer cancels to $0 (contract ends), not a partial reduction)
Expansion ARR (increases in recurring value (more seats, higher tier/module, or price increase), not decreases)
Related Metrics
Source metrics: Contraction ARR
Commonly mistaken for:
Down-sell ARR (tier/plan downgrade or removing a paid module (feature change), not fewer seats or price-only cuts)
Logo Churn ARR (customer cancels to $0 (contract ends), not a partial reduction)
Expansion ARR (increases in recurring value (more seats, higher tier/module, or price increase), not decreases)
Related Metrics
Source metrics: Contraction ARR
Commonly mistaken for:
Down-sell ARR (tier/plan downgrade or removing a paid module (feature change), not fewer seats or price-only cuts)
Logo Churn ARR (customer cancels to $0 (contract ends), not a partial reduction)
Expansion ARR (increases in recurring value (more seats, higher tier/module, or price increase), not decreases)
Source of:
Index