What is Customer Attrition and How Do You Reduce It?

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Written By SmarterrMoney.org

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Subscription-based businesses are often laser-focused on finding new customers. While customer acquisition is essential, you should really be worried about how to retain your existing customers. 

Customer attrition (also known as customer ‘churn’) is the rate at which your business loses customers. It’s an inevitable part of doing business. However, a high attrition rate could severely limit your company’s growth. 

The good news is that once you understand your customer attrition rate, there are plenty of strategies you can use to reduce it. In this article, we’ll explain what customer attrition is and why it happens before discussing the techniques and tools you can use to keep more of your customers. 

Here’s what we’ll cover in this article:

What is customer attrition?

Customer attrition, also called customer churn, is the loss of customers over a given period. Some amount of customer attrition is inevitable, but a significant attrition rate can impact your business’s bottom line since it’s a direct loss of revenue. The quicker customers leave, the higher your customer acquisition cost will become and the lower your customer lifetime value metric.  

You can see the impact customer attrition can have on a business in the graph below. A 5% difference in churn rate between two companies with the same acquisition rate can result in a 500% difference in the total number of customers in two years.

In other words, measuring your customer attrition metric, identifying why customers leave, and employing proactive strategies to reduce churn are vital. 

Several factors can cause customer attrition — we’ll discuss them in more detail below. For now, know that customers can leave of their own accord because of poor customer service or unaffordable prices (voluntary customer attrition), or they can inadvertently stop using your service because of payment failure (involuntary customer attrition).  

Customer attrition is often conflated with customer retention, especially when discussing ways to keep customers from churning. However, they’re‌ opposites. Customer retention is the rate at which your business retains customers over time, where customer attrition is the rate customers leave your business. Therefore, by improving retention, you should theoretically reduce attrition. 

What causes customer attrition?

“Why are customers leaving?” is the first question marketers tasked with reducing churn tend to ask. And it’s an important one, because you can’t develop an effective retention strategy if you don’t know what causes customer attrition. 

Thankfully, most customers don’t cancel their subscriptions on a whim. Likely, they do so for one of the following reasons. 

Poor customer support

Customers want to feel understood and valued by businesses. Almost 90% say experience is as important as a company’s products or services.

If you aren’t meeting these customer satisfaction expectations, they may be more likely to churn. When customer service is poor, attrition increases. In fact, over three-quarters of customers will go out of their way to use a company with better customer service. 

A lack of ROI

Few businesses will persist with a tool that fails to deliver a return on their investment. If your tool costs businesses more money than they generate from using it, a cancellation is inevitable. 

This is why customers often list price as one of their reasons when canceling a membership. The price is too high for them to see a return. And, as budgets tighten, this reason will only get more common. 

Having a competitive pricing structure isn’t enough, however. Companies must prove their product or service can deliver a return for businesses.

Bad onboarding

Do you find that customers cancel their subscriptions after only a couple of months? A bad onboarding experience could be the reason.

When you don’t create an in-depth onboarding strategy — whether it’s an automated workflow or led by a member of your customer success team — you leave it to customers to get set up and extract the most from your product. That’s not a great start to the customer journey. 

Unfortunately, most customers will have better things to do than spend hours trying to get to grips with a new tool. This can result in a perceived lack of value (see above) and, ultimately, attrition. 

Poor product-market fit

Poor product-market fit occurs when your product doesn’t meet customer expectations. They think it solves one pain point when your product actually solves something entirely different. When customers realize that, a contract cancellation can swiftly follow.

This typically happens because of a lack of alignment between sales and customer support.

Payment failures

Involuntary customer attrition can cause churn just as much as voluntary customer attrition. One example of this is payment failure. We estimate that up to 10% of your revenue may be at risk of a payment failure. 

Payments can fail for several reasons, including: 

  • An expired card
  • Network downtime
  • Insufficient funds

Your job is to make sure that one payment failure doesn’t automatically result in churn.  

How to calculate customer attrition

Calculating customer attrition or customer churn is easy, but you’ll need a few pieces of information first:

  • The period you want to calculate customer attrition over
  • The number of customers you had at the beginning of that period
  • The number of customers you had at the end of the period

Next, enter that information into the following formula:

Customer Attrition = [(Customers at the beginning of a period – Customers at the end of that period) / Total customers at the beginning of that period] x 100

That’ll give you a customer attrition rate as a percentage. This is also known as customer churn rate. 

For example, let’s say we want to calculate customer attrition over the first quarter of the year. At the start of that quarter, we had 1000 customers. We have 900 customers at the end of the quarter. Entering that information into the formula, we get:

Customer Attrition = [(100-90)/100] x 100

Or 10%

It’s important to note that customer attrition calculations can be influenced by the number of new users you bring on board. If you lose 100 customers, like in the example above, but bring on 50 new customers, then you’ve only really lost 50 customers, which equates to a 5% attrition rate. Not 10%. Bear this in mind when calculating your customer attrition rate. 

What is a good customer attrition rate?

Unfortunately, there isn’t a straightforward answer to this question. Obviously, you want to have the lowest customer attrition rate possible. But how big that figure is will depend on a lot of factors. 

The best way to benchmark your customer attrition success is to compare your rate to the industry benchmark.

(Image Source)

From the image above, customer attrition rates (and customer retention rates) vary significantly between different industries — and some are much higher than you might think. In other words, if your attrition rate is 10% or under, you’re doing great.

How to reduce customer attrition

You can use a combination of proactive and reactive strategies to reduce customer attrition. Try one or more of the following five methods. 

Engage customers regularly

Regular communication with your existing customer base is a great way to strengthen customer relationships and decrease attrition. You show customers you care about them and are committed to improving the customer experience. 

A common strategy for SaaS businesses is to email customers major product updates. Highlighting new features can help keep customers engaged and give them a reason to keep using your product. It also shows your commitment to improving your tool. 

You can also take a more targeted approach to customer interaction by identifying at-risk customers. 

Have one of your customer success providers reach out to this segment of your customer base with individual, personalized emails and ask how they are finding your product and whether they need help maximizing value. 

This demonstrates you value their thoughts and are committed to helping them achieve ROI. It also gives existing customers a chance to raise issues that you might not have otherwise heard about. 

Demonstrate and improve ROI

Customers want to know they are getting a good deal, so make sure to regularly remind them of the value your business generates. 

This can happen within your tool, by including a dashboard that shows relevant KPIs such as time saved or revenue won. 

Regular reminders are great, but demonstrating a customer’s ROI becomes really powerful when they are on the cusp of canceling. In the image below, businesses can use a platform like Chargebee to create a popup during the cancellation process that showcases the customer’s activity levels and potential ROI. Coming face to face with a personalized reminder of what they stand to lose can be enough for customers to give you another chance. 

You can also offer businesses discounts that’ll reduce the price of your product and improve ROI while also reducing churn. 

A common strategy for SaaS companies is to offer 12 months of service for the price of 10 if businesses pay for a full year in advance. It’s a win-win for both parties. Customers get a better deal, and you don’t have to worry about that customer churning for another year. 

Upgrade customer onboarding and support

A thorough, well-designed onboarding experience can be the difference between a customer falling in love with your product or getting so frustrated that they cancel their subscription after three months. 

Customers can find it overwhelming when they first use your product. But both automated, in-app onboarding processes and personalized walkthroughs led by customer success teams are effective at easing the transition. 

The important thing is to make sure new customers have everything they need to see a return on their investment as quickly as possible. The faster you get customers up and running with your product, the more value they’ll derive. 

Once customers have become regular users, make sure they continue to get value from your product through an exceptional customer service experience. Every customer is bound to run into a problem at some point during their relationship with your business. The difference between retention and attrition could come down to how well your customer support team helps them overcome their problem. Customers will forgive errors if they receive excellent customer service, while they won’t be so forgiving if your support team fails to deliver. 

Improve retention strategies

While it’s best not to leave efforts to reduce customer attrition to the last minute, a customer retention strategy that catches customers in the act of cancellation and convinces them to stay can work wonders. 

If you’ve ever canceled a SaaS subscription, you’ve probably been given a personalized incentive that encourages you to continue paying. A free month’s subscription or an annual discount are common offers.

They’re easy to implement with a platform like Chargebee. As shown in the image below, you can set up a workflow whereby customers are served up personalized retention offers the moment they click cancel. 

You don’t have to wait for customers to go through the cancellation process before implementing a retention strategy, however. You can also reduce the likelihood of churn by introducing things like a customer loyalty program that encourages customers to continue using your product. 

Analyze churned customers

You can learn a lot from customers who have already left. By collecting customer feedback when customers cancel their subscriptions, you can conduct customer attrition analysis, identify the most common reasons for churn, and then set about fixing them.

If a significant number of churned customers cite a lack of a particular feature as the reason they churned, for instance, your product team can add it to their development list.