Glossary of Human Resources Management and Employee Benefit Terms
In business, the most common definition of attrition is the process of deliberately reducing the size of a workforce by not replacing employees when they leave voluntarily (employee attrition). However, attrition also has another meaning. The term can refer to a business’s customer base shrinking when current customers leave and are not replaced by as many new customers (customer attrition).
Let’s talk about employee attrition first.
Problems with management, working conditions, etc. sometimes worsen until they compel some employees to quit—a worst-case scenario that needs to be remedied for the well-being of both employees and employer. But even without such issues, some employee turnover is normal. Workers may voluntarily leave their jobs for a variety of other reasons, including:
Finding a better job elsewhere
Moving to another city
Successful businesses generally fill vacancies as they occur, maintaining the size of the staff. But there are times when companies freeze hiring, leaving vacancies unfilled. For example, sometimes positions become obsolete due to structural or operational changes in the business. Or if an organization faces financial difficulties, it may have little choice but to cut labor costs by reducing headcount. In either case, employee attrition is a more humane and less disruptive way to reduce the size of the workforce than laying people off.
When companies seek to downsize via employee attrition, it may take months or even years to reach the desired staff size because attrition is voluntary and somewhat unpredictable. Some companies that need to downsize right away offer financial incentives for their employees to leave, accelerating this process.
An employee attrition rate is a measurement of employee turnover over a specific time period, typically one year. It helps employers know whether they are doing a good job retaining their talent in times when downsizing isn’t necessary or desirable. Here are the steps to calculate an annual employee attrition rate:
Determine your average number of employees during the year. To do this, add the number of employees at the beginning of the year to the number of employees at the end of the year, then divide by two.
Divide the number of employees who left voluntarily during the year by the average number of employees you calculated in the first step.
The result is the attrition rate, which is generally expressed as a percentage.
For example, if you have 90 employees at the beginning of the year and 110 at the end of the year, 90 + 110 = 200. Dividing that result by two shows you had an average of 100 employees during the year. If 20 employees left during the year, dividing 20 by 100 shows the attrition rate is .2, which is 20 percent.
The average employee attrition rate varies significantly between companies and industries. If your rate is higher than your peers’ rates, these steps can help improve retention:
When hiring, be sure new employees not only have the necessary skills to do the job but are also a good fit for your culture.
Make sure your compensation package is competitive.
Survey employees regularly, and then use their feedback to make changes that will increase their job satisfaction.
A shrinking customer base is a red-flag warning that a company faces significant concerns about its future. As soon as the trend is recognized, companies need to learn what’s behind it and strategize about the best ways to deal with it.
Customer attrition can happen for a variety of reasons, both within and beyond the company’s influence. Common reasons customers leave include:
Defecting to a competitor
Poor product quality
A negative experience with a customer service representative
Customers moving away
Illness or death of customers
Customer attrition is also often seen in companies that fail to adapt to changing customer preferences or changes in the marketplace itself. For example, the Blockbuster video-rental chain that was popular in the 1980s became obsolete instead of reinventing itself for the world of streaming media. Even the once-mighty institution of printed newspapers is now threatened with extinction as long-time customers perish and a younger generation gets its news online for free.
To measure the customer attrition rate for a given time period, simply divide the number of customers lost during the period by the number of customers at the beginning. The resulting percentage is your customer attrition rate.
For example, if a company had 1,000 customers on January 1 and 900 on the following December 31, it lost 100 customers during the year. 100 divided by 1,000 equals .1, which is 10 percent.
The typical rate of customer attrition varies by company, industry, competition, and other factors. Obviously, the lower the rate of attrition the better. If your organization’s rate is higher than your peers’ rates, don’t think of it as a sign of inevitable failure but as an opportunity to identify the issues and make improvements.