When you start a business, the objective is to find top talent who will work together in driving the company forward. While loyalty is highly valued by employees, businesses must accept that employees can and will leave companies at some point. Attrition is inevitable for every business.
Attrition is a term that is commonly referred to in business and human resources. It has two meanings:
It is the process of gradually downsizing or decreasing a company’s workforce intentionally by not replacing employees when they retire or resign voluntarily. This is called Employee Attrition.
Example:
After being with the company for 20 years, Maria has decided to retire. The company is not planning to hire a replacement for Maria’s position. Maria is part of employee attrition.
Maria is leaving voluntarily.
The company will not replace her (reduction in workforce).
2. It is the term used when a business unintentionally loses its customers or client base and they are not replaced by new customers. This is called Customer Attrition.
Example:
Company A had 500 customers in January and only 300 customers in December of the same year.
The company’s customer base decreased which was not deliberate.
They did not gain new customers.
Ready to get to know more about the two types of attrition? Let’s begin with the employee attrition first.
Why does Employee Attrition occur?
Multiple reasons can cause an employee to resign. The dissatisfaction may be rooted in the job itself, management, lack of opportunity, poor working conditions, etc. In this case, the employer should get to the bottom of the issues to remedy the situation.
On the other hand, the reason for resignation may also be personal. Some examples are relocation to another city, going abroad, finding a job with a better offer, deciding to stay at home, retirement, or illness. There can be a variety of reasons for voluntary resignation.
No matter the cause, businesses have to decide how they will react to such resignations. Some employers can fill the vacancies as needed. However, in employee attrition, employers will not hire replacements. This is called a hiring freeze. Organizations can resort to a hiring freeze when faced with financial stress. Compared with laying off employees, this is considered a less disruptive way to reduce staff.
When a company wants to downsize, reducing the headcount through employee attrition can be a long process. Because attrition is voluntary, they cannot predict when an employee will resign.
How is Employee Attrition measured?
Employee attrition rate describes the rate at which employees leave the company over a specific period. Businesses use attrition rates to evaluate the effectiveness of their retention efforts when they are not intentionally reducing the workforce.
To compute your company’s annual employee attrition rate, follow these steps:
Find out the average number of employees during the year.
Get the sum of the number of employees at the start of the year and the number of employees at the end of the year.
Divide this number by two.
2. Find out the number of employees who resigned voluntarily. Divide this number by the average number of employees during the year (you got this number in Step 1).
3. Multiply this number by 100 to get the employee attrition rate in percentage form.
Or, another way to compute for employee attrition rate is by using this formula:
Number of Employees who Resigned During the Year Average Number of Employees for the Year
Example:
Your company had 80 employees at the start of the year and 120 employees at the end of the year. Throughout the year, 20 employees resigned. What is your attrition rate?
Find out the average number of employees for the year.
80+ 120 = 200
200 ÷ 2 = 100 (average number of employees for the year)
Divide the number of employees who resigned by the average number of employees for the year.
20 ÷ 100 = 0.2
Multiply this by 100 to get the employee attrition rate in percentage form.
0.2 × 100 = 20%
Your company’s employee attrition rate is 20%.
What can you do if your company’s employee attrition rate is high?
There are different average employee attrition rates for different industries. If you find that your attrition rate is higher than expected or is much higher compared to your competitors, it is a good idea to revisit your hiring process and retention efforts.
For instance, rather than wondering if your employees are happy, be more proactive. Conduct surveys regularly to get the pulse of your workers and adjust accordingly. In hiring candidates, be more mindful of evaluating whether the candidate will be a good fit for your company culture. There are many retention practices to explore.
Why does Customer Attrition occur?
Now, let’s talk about the other meaning of attrition. A dwindling customer base is never a good sign for a business. This usually means that the company’s product no longer satisfies the needs of the customers. They might have outgrown the product and no new customers are coming in.
Aside from this, there can be many reasons why a business loses customers. Product quality, a negative customer experience, or finding a better offering from a competitor can be several potential reasons for customer attrition.
Why is it important?
Paying close attention to customer attrition is vital for a business to thrive. By studying the customer attrition rate, businesses can take a proactive stance by preventing attrition. How? It may involve adjusting your products, sales efforts, improving customer service, or even developing new product lines.
How do you compute the Customer Attrition Rate?
To compute your company’s customer attrition rate, follow these steps:
Find out the number of customers lost during a specific period.
Divide the number of customers lost by the number of customers in the beginning.
Multiply this by 100 to get the customer attrition rate in percentage form.
Or, another way to compute for customer attrition rate is by using this formula
Number of Customers Lost during a specific period Number of Customers at the beginning
Example:
Your company had 1,000 customers on January 1 and 900 customers on December 31. This means that the company lost 100 customers that year.
Divide the number of customers lost by the number of customers at the beginning.
100÷ 1000 = 0.1
Multiply this by 100 to get the customer attrition rate in percentage form.
0.1 × 100 = 10%
Your company’s customer attrition rate is 10%.
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