A gradual reduction or dwindling of a thing or item
Written byCFI Team
What is Attrition?
Attrition, in a general sense, is a gradual reduction or dwindling of a thing or item. From a business perspective, there are two ways to define attrition. Attrition for a business can be described as either employee attrition or customer attrition – both being very important to understand as a business owner.
Summary
- Attrition is a gradual reduction or dwindling of a thing or item.
- Attrition in business is utilized to discuss employee attrition and customer attrition.
- Calculate attrition rates by taking the number of employees or customers that left and divide it by the average number of customers or employees.
Types of Attrition
1. Employee attrition
Employee attrition is used to describe the reduction of employees. Employee attrition can take place for a multitude of reasons. The reasons may include employees retiring, finding other job opportunities, or leaving due to unhappiness within the company.
However, it is important to note that for it to be defined as employee attrition and not just a part of employee turnover, business owners or management must make the decision not to refill the specific position that is now empty.
Within employee attrition, there is either voluntary or involuntary employee attrition. The distinguishing factor for both kinds of attrition versus employee turnover is the fact that with attrition, the positions are not quickly filled up or filled up at all.
Voluntary employee attrition examples include employees leaving to pursue other job opportunities or retiring. On the other hand, involuntary employee attrition includes job position elimination due to business downsizing.
2. Customer attrition
Customer attrition, otherwise known as customer churn or customer defection, refers to the reduction of clients. It involves the loss of clients or customers. Customer attrition can take place when a business product or service is not being adaptive to changes in society or when customers no longer value the product or service. It’s important to note that there can be voluntary and involuntary customer attrition.
To be explained further, a business may undergo customer attrition because a customer needed to move away. In such a case, the customer attrition is involuntary. On the other hand, an example of voluntary customer attrition is when a customer is unimpressed with the customer service and takes their business elsewhere.
It is important to notice the different kinds of customer attrition because when calculating customer attrition rates, it is vital to highlight the voluntary attrition rates for your business.
Calculating Attrition
To calculate the attrition rate for your company in one year, you take the number of employees or customers that left and divide it by the average number of customers or employees. The rate can also be defined as a churn rate.
Practical Example
Consider a business that employs 100 individuals in 2020. Throughout the year, the number of employees decreases, and 10 employees leave for several different reasons – voluntary and involuntary. Since the business is not as busy as it used to be, the company decides not to refill the vacated positions to save money on labor costs.
To calculate the employee attrition rate, divide 10 by 100. The calculation will demonstrate that for 2020, the company recorded a 10% employee attrition rate since it is now left with 90 employees.
Importance of Attrition
As an employer, attrition is important to understand because it can decrease labor costs without incorporating staff departures. As employees retire, the company can perform what is called a hiring freeze. It means that when employees start to retire, the company doesn’t replace them. It allows the company to save money in labor costs should they require it.
Potentially, companies may utilize employee attrition if the business is undergoing customer attrition. Businesses can utilize customer attrition rates to analyze how they are retaining existing customers. It will demonstrate whether customers are loyal and are returning to utilize their service or buy their product again.
The attrition rate of the company can be a key business rate to utilize because it is important for a business to retain customers since, typically, there are fewer costs involved in returning customers than in acquiring new ones.
Additional Resources
CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:
