THE HIDDEN COST OF CUSTOMER ATTRITION
April 2016

It may surprise you just how much each lost customer is costing your business.

Are you in a business that invests heavily to acquire new customers, while losing customers at an even faster rate?

A recent client of ours was experiencing significant attrition. The sales organization was growing the customer base by 12 percent annually, but existing customers were bailing at an even higher 15 percent attrition rate. With high fixed costs and 15 percent to 20 percent annual price declines, the client needed the incremental customers, but it could not fill the leaky customer bucket quickly enough. The client was selling very hard but falling further behind every year.

Our analysis of the client’s customer base helped address a few key questions and uncovered a surprise about the impact of attrition on the business. We started by deconstructing recent financial performance into several value drivers:

• New customer acquisition
• Existing customer attrition
• Growing or shrinking volume among existing customers
• Price compression
• Cost reduction
• Cost leverage from growing volumes

We found that customer acquisition and attrition had a significant impact on profitability, as did cost reduction efforts, but price compression (negative impact) and cost leverage (positive impact) were much bigger value drivers.

Most surprisingly, attrition turned out to be a big driver of price compression. Existing customers demanded (and received) price discounts each year, but new customers were acquired at an even greater price discount than existing customers. As a result, a 3-year-old customer could deliver two to three times the margin of a new customer. This meant that for each existing customer that left, the company needed to bring in 1.2 new customers at an approximately 20 percent lower price to replace the lost revenue, and two to three new customers to replace the lost margin.

The client now understood that attrition had an even greater impact on business value than expected. Improving customer retention not only would allow the client to grow more quickly, it would also slow the price compression that was mercilessly eating into its margins.

Thoughts?

Joe Bouch, CEO 78Madison
A full service marketing communications firm and advertising agency in Altamonte Springs (Orlando) Florida