What is customer attrition?

Customer attrition - also known as customer churn, turnover, or defection - is when clients or customers end their relationship with a company (1). Most businesses classify a customer as churned after a certain period of time when the customer has not interacted with or purchased from the company. Service-based businesses that are largely driven by promotional offers - like cellphone and Internet service providers - are perhaps most affected by customer attrition. However, any business that depends on revenue from continued relationships with consumers should give close scrutiny to this key growth metric.

When analyzing data and using it to predict future market behavior, most businesses make a distinction between voluntary and involuntary attrition, which signifies whether or not the customer deserted the company due to dissatisfaction. Voluntary attrition occurs when the customer abandons the services of one company in favor of another. Involuntary attrition occurs when personal circumstances are the reason for leaving, including death, relocation to another area or health problems. Most companies focus only on voluntary churn in their attrition analysis models.

Benefits of tracking attrition

Customer attrition is a key metric of business health. In most industries, the cost of acquiring new customers exceeds the cost of marketing to existing ones, so monitoring attrition on a regular basis can help you project future growth or declines. Many companies now track customer lifetime value as a key benchmark when planning the marketing costs for acquisition, but it's hard to find this data without first investigating customer churn.

• Customer loss: Knowing how many customers you are losing and what their average lifetime value is will allow you to determine the percentage of overall business lost.

• New sales needed: After figuring out how much business has been lost, you can determine the new business needed to offset and exceed those losses. Businesses will also need to weigh these new initiatives against the costs associated with acquiring new customers.

• Customer retention rate: When you know the customer attrition rate, you also know how many customers the business has retained. Comparing the two can sometimes offer valuable insights into the factors that contributed to churn.

Measuring customer attrition

There are several ways to measure churn. Some companies measure gross attrition while others focus on net attrition in their analyses. Gross attrition measures the total number of customers and revenue lost during a given period of time. Net attrition measures customer loss while factoring the gain of new customers in the same group and location. Examples of how to measure attrition include:

• Counting how many customers have been lost

• Calculating the percentage of churn against the entire customer base

• Determining the value of business churned on a repeating basis

• Calculating the percentage of business churned on a repeating basis

Why do customers leave, and how can companies reverse this trend?

A study of communications service providers by Bain & Company found that businesses often make wrong assumptions about why customers leave (3). A lack of communication, from the customer all the way to the CEO, is often a major contributing factor, allowing companies to overlook certain realities about attrition:

• Dissatisfaction is built over time: Executives often believe that the last event that occurred before a customer's departure - like a promotional offer from a competitor - was what caused the defection. Competitive offers do often trigger the switch, but only after a longer period of dissatisfaction has characterized the customer journey. Sometimes these negative experiences can last years before the customer makes a jump to your competitor. Bain's study points out that early and decisive supervisor intervention during an escalating problem can reverse eroding trust on the part of the consumer and restore satisfaction.

• Fixing one problem does not fix all problems: The study also claims that companies often think fixing one problem will reduce churn, when in fact there may be multiple root causes contributing to this decline. Customer dissatisfaction can stem from many areas, including pricing, installation, technical problems, customer service and billing. Only detailed customer feedback can help businesses understand and address these problems.

• A satisfied customer is not enough: Companies sometimes take satisfied customers for granted, assuming that as long as no problems exist, they should expect the business relationship to continue for the foreseeable future. But a satisfied customer is not always a fan. Companies should surprise and delight customers, particularly high-value ones, when opportunities present themselves. Customers who are also advocates are usually more forgiving when mistakes occur, leaving the company less vulnerable when a problem pops up.

• Empower employees to share feedback and solve problems: Having systems and processes in place for customer satisfaction is not enough. Businesses must integrate customer feedback into the operations of the company and channel those comments to the employees who are most able to respond quickly. Companies that make customer experience a high priority tend to encourage departmental collaboration and team problem solving that will lead to structural improvements.

Customer attrition is a reality for all businesses that rely on revenue from continuing customer relationships. While it may be impossible to stop churn from happening altogether, companies can take steps to understand and respond to the root causes of customer dissatisfaction while seizing opportunities to "wow" satisfied customers, turning them into advocates that will support your growth for years to come.

1. "What is customer attrition and why does it matter?" 2. "Customer Churn Rate: 15 Tactics to Improve Your Churn Rate" 3. "Breaking the back of customer churn"