Gross MRR churn = (cancelled MRR + contracted MRR) ÷ starting MRR
The second term in the numerator is the one that gets dropped.
Downgrades are churn
A customer who cuts from 40 seats to 15 has not left, so they never appear in a logo churn number. The revenue is gone all the same.
Excluding contraction produces the most flattering possible reading: a base that is steadily shrinking while every retention metric looks fine, because nobody is leaving. Teams discover it when the annual number does not reconcile.
Gross and net are different questions
- Gross MRR churn: what leaked. Cancellations plus contractions only.
- Net MRR churn: leakage minus expansion. Can be negative, which is the
well-known "negative churn" and simply means expansion exceeded losses.
Report gross. Net MRR churn is the same information as net dollar retention stated inversely, and publishing only the net figure hides whether the expansion motion is carrying a retention problem.
Starting MRR, always
New customers acquired during the month do not belong in the denominator. Including them makes churn fall while you grow and spike when growth stalls, which is the identical error described in churn rate.
A worked example
Start the month at $420,000 MRR. During it: $9,400 cancelled, $3,100 of downgrades, $14,800 of expansion, $31,000 of new business.
Gross MRR churn = (9,400 + 3,100) ÷ 420,000 = 2.98%
Net MRR churn = (12,500 − 14,800) ÷ 420,000 = −0.55%
Negative net churn reads as a strong month, and it is. It also sits on top of almost 3% gross leakage, which at that monthly rate is over 30% annually. Reporting only the net number loses that entirely.
Annualising
Compounding, not multiplication. 2.98% monthly is not 35.8% a year:
1 − (1 − 0.0298)^12 = 30.4%
The traps
- Excluding downgrades.
- New MRR in the denominator.
- Reporting net without gross.
- Annualising by multiplying.
- Counting a pause as a cancellation where the customer reliably returns.
Where this sits
MRR churn is Measurement in the Tenbound Pipeline Architecture Standard. Contraction in particular is where an acquisition problem surfaces first: accounts bought outside the ICP downsize before they leave, usually a quarter or two ahead of the cancellation.