Contraction MRR is the total reduction in MRR due to downgrades and subscription cancellations (or churn) compared to the previous month.
Your MRR could contract (reduce) when:
A customer cancels a subscription and stops paying for the product or in other words when a customer churns.
A customer downgrades from the existing plan to a lower-priced one.
A new customer avails a discount.
A customer removes any add-ons (like additional features, users, etc.)
Contraction MRR takes into account both downgrade MRR and Churn.
Contraction MRR = Downgrade MRR + Cancellation MRR
Contraction MRR helps you understand how well your business is able to retain customers is and how well your product scales with your customers’ growth.
If your contraction MRR is high it could mean
Your customers are canceling their subscriptions or in other words, churning.
Your customers are downgrading to lower plans as they either don't find value in your higher price plans.