To make informed decisions when developing marketing plans, business plans and budgets it is important to know the customer attrition, retention and acquisition rates for the business. The customer attrition rate indicates the percentage of customers that are lost over a specified time period. This factor supports more effective planning for sales and marketing programs. Sales and marketing efforts must at least attract enough new business to replace the lost business. Developing marketing programs and sales projections with this goal in mind will enable higher quality forecasts and plans as well as provide for the ability to measure actual vs. expected results.
Calculating the Customer Attrition Rate
The standard calculation for customer attrition rate is to calculate the customer count at the end of the period minus customers added during the period divided by the number of customers at the start of the period. The period of time is generally one year. However in the tire and auto repair industry customer and vehicle records are retained for several years due to the importance of repair history. It’s important to have access to repair records for several years after the fact. Also maintaining customer contact information is beneficial for marketing purposes. So a slightly modified approach to calculating this factor should be applied. When calculating the customer count at the start and end of a period a good practice is to filter this count by excluding customers that haven’t had activity within the specified period of time prior to the start date and the end date. Otherwise the attrition rate will be overstated.
Calculating the Customer Retention and Acquisition Rates
The customer retention rate is the inverse of the Attrition rate. So if the customer attrition rate is 30% the retention rate is 70%. The acquisition rate is the rate at which new customers are added. This is calculated by dividing the number of new customers gained during the period by the number of customers at the start of the period. So if the number of customers at the start of the period was 100 and 10 new customers were added then the acquisition rate would be 10%.
Planning for Improved Customer Retention
Customer attrition rates can be lessened thereby increasing retention rates. One factor to consider is the reason customers don’t return. Some reasons can be dealt with and some can’t be helped. For example a customer leaving the area is not something the shop can control. But quality and service issues can be dealt with and improved. The only way these things can be measured is to follow up with customers and survey their feelings about the service they were given. If reasons for lost business are recorded, they can be a powerful tool in making improvements and improving customer retention rates. In addition, customers who are happy with service may leave because someone else attracted them through marketing efforts. So marketing to existing customers and offering incentives to return can do a great deal to improve retention rates. Not doing so can result in lower retention rates. So measuring reasons for customer attrition and making improvements in areas where weaknesses are identified as well as directing marketing efforts at existing customers can contribute to higher retention rates.
Planning for Greater Customer Acquisition Rates
Knowing customer acquisition rates can help in planning for marketing programs. If past customer acquisition rates and the referral source of new customers during that period are known then the effectiveness of marketing efforts can be measured. So knowing the percentage of customers acquired through a certain marketing campaign during a given time period will provide valuable information in developing future marketing campaigns.
The Cost of Retention vs. Acquisition
There are those that espouse the theory that it’s X times more expensive to acquire a new customer than to retain an existing one. This relationship can vary from business to business. Dividing the total cost of marketing to existing customers by the number of customers retained will determine the cost of retaining an existing customer. Likewise dividing the cost of marketing to new customers by the number of new customers acquired will be the cost of acquiring a new customer. Knowing this will allow the most effective allocation of marketing resources going forward.
The effective use of customer attrition, retention and acquisition rates involves applying them in the successful allocation of marketing resources. If the cost of customer retention is less than acquisition then it will be advantageous to direct more marketing resources toward retention. If new customer acquisition is less expensive the reverse would hold true. Utilizing knowledge of these rates can result in the most effective use of marketing resources. The quality of business plans, sales projections and marketing plans are much improved when knowledge of customer attrition, retention and acquisition rates are included in the planning process.