Here’s Why You Need to Understand and Calculate Your Company’s Attrition Rate (Both Employee & Customer)

by Corey Philip //  September 12, 2022

In the world of business, company attrition rates are valuable metrics that help directors and HR departments monitor the progress and success of an organization. This article introduces the differences between employee and customer attrition rates and explains why it's important to calculate and then listen to what your attrition rates are telling you.

But first, let's begin with a definition of attrition rates, so you're clear about what we mean by the term.

What is Attrition Rate?

There are two types of attrition rates that you need to consider: employee and customer attrition. Your company's employee attrition rate refers to the gradual but deliberate reduction in staff numbers over a specified time frame, which are then not replaced. As staff are fired, offered redundancy packages, or reach retirement age, the attrition rate is affected.

A reduction in staff at a particular company results from a hiring freeze and is seen as a less disruptive and more humane approach to consolidating the business than widespread layoffs. In some Human Resource (HR) departments, the attrition rate is referred to as a company's 'churn rate.' The attrition rate is also used to describe the loss of customers as they mature beyond a company's target market and are then not replaced by a younger group. Customer attrition also results from issues relating to customer service and product availability.

There is a helpful formula to calculate attrition rates, as we introduce a little later on.

What's the Difference Between Employee & Customer Attrition? 

There's an important distinction to make between employee and customer attrition, but both are important. Employee attrition refers to the reduction in your workplace talent pool (employees), while customer attrition is concerned with the shrinking of your client base (customers). Frankly, companies need to evaluate both employee and customer attrition rates, as they can significantly affect your business's profitability and ultimate success.

Why Does Attrition Occur? 

Attrition occurs for a range of reasons. You might be forced into downsizing your company's workforce for issues relating to pay, stunted growth, or even adverse workplace conditions. Broadly speaking, employee attrition occurs for one or more of the following reasons:

  • Inadequate pay and employee benefits.
  • Company stagnation caused by a lack of growth.
  • Poor working conditions.
  • Retirement, illness, or death.
  • Relocation.
  • Increased competition within the market that attracts your employees.

Moreover, customer attrition is likely to occur for the following reasons:

  • Deterioration of customer relationships.
  • Poor customer service offered by your employees.
  • Lack of availability of your products.
  • Supply issues with your products.

Regardless of why attrition rates occur, you need to calculate both employee and customer attrition, so you can plan to do something about it.

How Can I Calculate Attrition Rate? 

Most companies have access to special software that calculates their attrition rates and reviews the data monthly, quarterly, or yearly. But understanding the calculations involved in employee attrition will help you better understand the factors that influence the rate. Below, we look at how to calculate both employee and customer attrition rates.

Calculating Employee Attrition Rate

  • Begin by noting how many employees you have at the start of your monitoring period (be it a month, quarter, year, etc.)
  • Ascertain how many employees left your company within the period and how many were hired.
  • Add the number of employees who left to the number of new staff.
  • Calculate the employee average by adding the starting and ending numbers and dividing by two, then divide it by the number of employees who left to find the decimal rate of attrition.
  • Convert it into a percentage.

Here's an example:

You begin the period with 50 employees. Throughout this time, 14 staff left, while 3 were hired. Here's how you can calculate your employee attrition rate:

50 – 14 = 36
36 + 3 = 39 
50 + 39 = 89 89/2 = 44.5 
14/44.5 = 0.314 
0.314 x 100 = 31.4%

In this example, your employee attrition rate would be 31.4%. Generally speaking, lower attrition rates means that you're retaining employees. It's important to monitor the number over a sustained period of time, so you can note whether the attrition rate is rising or falling.

Calculating Customer Attrition Rate

To ascertain your customer attrition rate, you can follow the same steps as listed above. To provide you with an example, let's assume that you begin the period with 500 customers. You lose 80 customers but acquire 12 new clients. Here's how you would calculate your customer attrition rate:

500 – 80 = 420 
420 + 12 = 432
500 + 432 = 932 932/2 = 466 
80/466 = 0.173
0.173 x 100 = 17.3%

Monitoring your customer attrition rate monthly or quarterly will help you review your performance and initiate measures to stop you from losing clients. Just like employee attrition rates, the lower, the better.

What Are the Advantages of Understanding Attrition Rate?

Every year, the average American company will experience an 18% turnover in its workforce for a whole host of reasons. What's more, 89% of US customers will initiate business with a competitor if they receive poor customer service from your company. What these two statistics imply is that employee and customer loyalty is not as it once was.

Gone are the days of workers staying with the same company for their entire career, and consumers are less inclined to pledge their allegiance to one brand over another. With this in mind, it's advantageous to monitor your company's attrition rates, so you can ensure your business is moving in the right direction. Keeping an eye on the attrition rate also has the following benefits:

  • Improve your company's performance: High attrition rates generally mean you need to try something different. Consistently reviewing attrition ensures you can take measures to improve your company's performance before it's too late.
  • Increase loyalty: Employee and customer loyalty is exceptionally valuable to growth. Adapting your business practices to encourage loyalty within your staff and clients will see an improvement in your company's performance.
  • Reduce costs: Constantly hiring new staff and looking for new clients is expensive, as you incur marketing and onboarding costs, amongst others. Reviewing and lowing your attrition rate helps to keep costs down.

The Verdict: What is Your Company's Attrition Rate Telling You? 

Your company's attrition rates are valuable metrics. Understanding why you're losing employees or customers is vital, as you can implement actions to improve your company's overall performance.

It's essential to regularly review your attrition rate and listen to what it's telling you. Ignoring attrition can set your company on a downward trajectory that it's difficult to come back from.

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About the author

Corey Philip

Corey Philip is a small business owner / investor with a focus on home service businesses.

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