customer attrition rates in retail

What is a Good Customer Attrition Rate

TwitterFacebook

All businesses suffer customer attrition. But what is a healthy rate for you? And how do you stack up against others in your industry?

What is a good customer attrition rate? The obvious answer is zero. But that’s impossible (despite what your CFO might think).

Every company loses customers over time. It’s a business fact of life. Some industries suffer from customer churn more than others. Some businesses are amazing at retaining customers, others focus on customer acquisition to fuel their growth. 

So your comfort with your customer attrition rate is dependent on a lot of factors. The industry you’re in, your sales strategy, and the fundamental financial realities of your company. 

What is customer attrition rate

Before we go any further, let’s get on the same page and define exactly what is and what isn’t a customer attrition rate. 

Customer attrition rate is typically expressed as a percentage. The formula for customer attrition rate is calculated by taking the number of customers lost within a time period and dividing it by the total number of customers at the beginning of this time period.

Put simply, attrition is when a person stops being a customer of a company. The company loses that customer and has to replace them with another.

Some customers will only ever be one-time purchasers, others will return over and over again and regard themselves as life-long repeat customers. But at some time, every customer must end their relationship with a company. These disappearing customers create a phenomenon known by many names, including customer attrition, customer churn, customer turnover, customer cancellation, and customer defection.

Calculating your customer attrition rate

It’s easy to learn and calculate your particular attrition rate. Take a given sales period, like a business quarter. Subtract the number of customers you have at the end of the quarter from the number of customers you had at the beginning. Take that result and calculate it as a percentage of the number of customers you began with. 

For example, if you had one million customers in January, but ended the quarter with 800,000:

  • 1,000,000 – 800,000 = 200,000. 
  • 200,000 ÷ 1,000,000 x 100 = 20

The attrition rate for this example is 20%. But now we know that, is it good or bad?

Your customer attrition rate is not your customer churn rate

The example above compares two simple metrics: the amount of customers at the beginning of the quarter vs the amount of customers at the end of the quarter. These two figures do not tell us how many customers left the company and how many new customers joined the company. It only uses a net amount. 

For example, the company above could have lost 400,000 customers and gained 200,000 customers to give us the net loss of 200,000 and the attrition rate of 20%. Customer churn rates only focus on the amount of customers who stopped doing business with the company. So in this case the customer attrition rate is 20%, but the customer churn rate is 40%. 

customer attrition rate is different than customer churn rate (source)

Different kinds of attrition

So, you have calculated your attrition rate. It may be poor, it may be strong. But what’s next? The first thing to think about is what kind of business you are in and what type of attrition you have. There are two basic kinds of attrition: active attrition and passive attrition.

Active customer attrition

This is when a person has to make a conscious decision and action in order to stop being a customer of a certain company. It applies to subscription-based accounts like telecom, insurance, cable, entertainment, publishing, utilities, and internet providers. Basically anything you pay for either monthly, quarterly, or annually and that provides recurring revenue for the provider. It also includes services where you might not pay a regular fee, but have to maintain an account. These include banking and credit card companies, social platforms, and organizations. 

Passive customer attrition

This covers virtually everything else you buy; from retail to airlines; from automobiles to groceries. You don’t have to call up and cancel, close your account, or do anything to stop being a customer. All you need to do is stop purchasing from a certain company. There are many reasons why you might do this, but none of them require an action.

So when you think about your customer attrition rate, it’s important to consider which of these two describe your customers’ behavior. The average attrition rates are different for each, and they present distinct business challenges to overcome.

Customer attrition rates for five industries 

To give you a better idea of where your customer attrition rate should be, I’ve ranked a number of industries from highest to lowest. This is a rough guide but it lets you see how your score compares.

#1: Retail

Retail suffers from huge passive customer attrition. Retail-specific CRMs (customer relationship management software) and analysis tools are geared specifically to try to curb this. A lot of our purchases are discretionary (do we really need that new pair of pants?), so it’s very easy to just not come back and buy something new. In addition, there is enormous choice in retail, and we are very price sensitive. On the other hand, retailers have a lot of retention tactics to keep customers and we are very brand loyal to companies that provide great products and services.

#2: Banking and financial

Although people are very loyal to their banks and it is extremely inconvenient to move accounts, banks do suffer a lot from active customer attrition. This is because banking is an extremely emotional relationship for many customers (it’s their money!). Banks only need to make one mistake and they suddenly have a customer who is very motivated to leave no matter how hard it is.

#3: Telecom and internet

Another industry that makes it very hard for you to leave. However, customers do and it suffers from high attrition rates. The main reason for this is price vs value. The telecom and internet industries are notorious for raising their rates without notice. Their customer base typically takes a very negative view of this and are bombarded with better offers from competitors. So they switch.

#4: Cable TV

Although this is a discretionary purchase, people cannot seem to live without their TV. Like telecom and internet, the business model for cable seems to rely on the systematic raising of rates. However, in a lot of the country there is simply no competition and customers are locked in. I’ve put cable in the middle of the pack for now, but attrition rates are rising alarmingly due to streaming services, so I expect it to jump to the top in a matter of years. It’s worth noting that call center employees are trained to not lose customers and are given considerable authority to provide discounts in order to curb attrition

#5: Insurance 

Another industry that keeps its customer attrition rates low because it’s very hard to leave them. It’s no fun shopping around for insurance and it’s a purchase that doesn’t really affect your life other than the extremely rare times you use it. We simply don’t think about insurance that much which is why I have put it at the bottom of the list.

What can you do to reduce your customer attrition rate?

Here are four areas I suggest you focus on to reduce the rate at which you lose customers:

Get better customers

This is about targeting the right customers for acquisition. One reason customers may not remain long-term is that the particular customers that the company is acquiring are not the best fit for the company in the first place. It’s tempting to broaden your reach and entice as many customers as you can with low prices and unsustainable offers. But are these customers here for the deal or here for the long term? Some customers attribute a totally different market value to your products than do other customers.

Make a better product or service

An obvious factor to consider is the actual product or service you offer. It is actually the most important factor (and one they sadly don’t teach enough in business management school). Is it really what customers want? Is it better than the competition? Is it priced right? Are you investing in your brand to create something desirable to give you a differentiator in the marketplace that will keep customers returning again and again?

Provide better customer service

Today’s NOW Customers have high expectations for every interaction they have with a company, making it imperative that companies look carefully at how they manage their contact points with customers. What is your shopping experience like? Is anything involuntary happening on the technical side of things? Can customers find all the information they want about the company’s offerings and policies? How long does delivery take? What is the customer service or support experience like? All of these issues (and many more) factor into a company’s customer attrition rates.

Do better marketing

Modern consumers expect companies to understand them, their preferences and their needs – and not waste their time with irrelevant, annoying communications. In other words, companies need to communicate with every existing customer in a highly personalized manner, using the messages, channels and frequency that work best for each individual customer.

Predicting customer attrition is the best way to lower your rate

Knowing exactly when a customer is going to leave is key to lowering your customer attrition rate and boosting your profits. Not only is it more difficult and expensive to acquire a new customer than it is to retain an existing customer, you already have data on your existing customers that can be analyzed to determine the most effective messages and offers for each one.

When you attempt to prevent active attrition, you have the advantage of knowing exactly when a customer wants to leave. You can then deploy aggressive tracking techniques designed to change the customer’s mind, like offering a lower cost, including free add-ons, etc.. Knowing the customer journey is key here. But you also have the disadvantage of having to change the mind of a consumer who has already decided to leave.

If you have to reduce passive attrition, you have a harder task. You don’t know exactly when the customer is leaving, but they do leave clues. Maybe their average spend has dropped, or they are shopping less regularly. These “churn signals” tell you to proactively communicate with the customer, send them relevant offers and otherwise entice them to remain active customers. 

Improving your good attrition rate

Like I said at the beginning, customer attrition rates are a fact of life and no one can make them go away entirely. However, if you measure your rate accurately, compare it to your industry and your past performance, and factor in a realistic view of your business priorities, you can take a sober look at your rate and see if you are comfortable with it. 

It’s not a one-size-fits-all metric.