A Definition of Attrition Rate
A common attrition rate definition refers to employee or staff turnover, but in a broader sense, attrition rate is a calculation of the number of individuals or items that vacate or move out of a larger, collective group over a specified time frame.
Attrition rate is also commonly referred to as churn rate. A term often used by human resources professionals to determine a company’s ability to retain employees, attrition rate is increasingly used in the marketing world as a figure that points to the company’s ability to retain customers or to project the number of new sales necessary to maintain the status quo, accounting for customer churn or customer attrition.
Calculating Attrition Rate: The Attrition Rate Formula
It’s actually quite simple to calculate attrition rate. It’s generally expressed as a percentage of customers and typically on a monthly or annual basis.
To calculate your customer attrition rate, use this simple attrition rate formula:
Number of customers lost by the end of the period divided by the total number of customers at the beginning of the period.
So as an example, to calculate attrition rate for a company that had 650 customers at the beginning of the month and 600 customers at the end of the month, the attrition rate formula would be:
Number of customers lost: 650 – 600 = 50 customers
Number of customers at the beginning of the period: 650
Attrition rate formula: 50/650 = .0769 or 7.7%
Attrition rate is a complimentary figure to retention rate, which refers to the number of customers retained during a given period, and to customer acquisition rate, which refers to the number of new customers acquired during a given period. The three figures together should equal 100 percent.
Advantages of Understanding Your Customer Attrition Rate
It’s so simple to calculate attrition rate that it may seem an unimportant figure. But to most businesses, keeping track of customer attrition rate is a key success metric. In fact, in most verticals it is more profitable to keep current customers than it is to acquire new customers.
There are exceptions to this rule; for example, companies that rely on a membership business model may make more money on new customers through a higher sign-on rate than they do with recurring membership fees. In these cases, customer acquisition rates may be more significant to the company’s bottom line.
In any case, companies that calculate attrition rate and monitor changes over time are able to pinpoint weaknesses and identify areas in which improvements can be made in order to increase customer retention and reduce customer attrition. Additionally, customer attrition rate is a valuable metric often used by sales teams to determine sales goals for the next month, quarter, or year, offering a figure on which to base the number of new sales required to maintain profitability.
Pros and Cons of Attrition Rate
Calculating attrition rate is a simple process for most businesses, and this metric can be used to formulate company goals and objectives. However, in some industries and verticals, attrition rate is not as easy to calculate. Marketing agencies can easily calculate attrition rate by consulting a list of currently active clients. But for businesses such as retail stores, determining the number of active customers is somewhat subjective.
Retailers may monitor return customers through online channels, coupon redemption, or other methods, but cash-paying customers are not as simple to track.
Relying on the total number of sales is a viable alternative in some circumstances, although using this calculation blurs the lines between attrition rate and acquisition rate, as it cannot accurately differentiate new customers from repeat customers without some form of individual customer identification. When promotional offers and redemption codes are used, tracking individual customers and monitoring repeat purchases becomes more accurate.
Companies aim for a low attrition rate. Companies that experience a sudden increase in attrition rate can use this data to investigate pain points and conduct further research into the motivations behind customer attrition, identifying opportunities to prevent customers from churning and retain their business.
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