In the context of subscription-based businesses and SaaS platforms, understanding how upgrades and downgrades affect your metrics is crucial for accurate reporting and decision-making. This article will help you understand these concepts and their impact on key business metrics.

What are Upgrades and Downgrades?

Upgrades occur when a customer moves from a lower-tier plan to a higher-tier plan, increasing their subscription value. This might happen when a customer needs more features, higher usage limits, or additional services. Upgrades are also considered when a customer moves from a shorter-term (i.e. monthly) plan to a longer-term (i.e. annual) plan.

Downgrades occur when a customer moves from a higher-tier plan to a lower-tier plan, decreasing their subscription value. This typically happens when a customer wants to reduce costs or no longer needs premium features. Downgrades are also considered when a customer moves from a longer-term (i.e. annual) plan to a  shorter-term (i.e. monthly) plan.

Impact on Key Metrics

Monthly Recurring Revenue (MRR)

Upgrades and downgrades directly affect your MRR calculations:

Expansion MRR: Revenue gained from existing customers upgrading their plans

Contraction MRR: Revenue lost from existing customers downgrading their plans

Net MRR Movement: The difference between Expansion MRR and Contraction MRR (plus new and churned MRR)

Customer Lifetime Value (LTV)

Upgrades increase the average revenue per customer over time, positively impacting LTV. Conversely, downgrades reduce LTV. Tracking upgrade and downgrade patterns helps you predict long-term customer value more accurately.

Churn Rate

While downgrades aren't the same as churn (complete cancellation), they can be an early warning sign. Customers who downgrade may be at higher risk of churning entirely. Some businesses track "revenue churn" separately from "customer churn" to capture this nuance.

Upgrade/Downgrade Pricing Methodology

An "upgrade" in some cases might show negative MRR movement when a customer moves from a monthly plan to an annual plan. This would lead to lower MRR per month, but higher LTV as longer-term plan users tend to provide more revenue to companies over time. 

Conversely, a "downgrade" might show positive MRR movement when a customer moves from an annual plan to a monthly plan, as the customer will pay a higher MRR but also lead to a higher churn risk.