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.
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.
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:
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:
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.