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The Hidden Costs of Customer Attrition

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

Are you investing heavily to acquire new customers, while losing customers at an even faster rate? A recent client of ours in the telecom sector 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. 

In a telecom sector 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.

Are you doing enough to deepen the relationship with your most valuable customers and lessening the attrition that may be eating you alive?

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Last updated: Dec 2, 2011

KARL STARK AND BILL STEWART | Columnist | Co-founders, Avondale

Karl Stark and Bill Stewart are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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