This is one measure, which every organization wants to be as accurate as possible in measuring. Every business case for a customer retention initiative talks about reducing the cost of customer attrition as part of its benefits. Here are some context setting statements:

• Customer attrition is not always undesirable: Organizations sometimes look for 'healthy customer attrition' for low value, risky and low potential customers, especially if the cost of retention is high. Therefore sometimes the cost of attrition is also seen as 'benefit of attrition'.
• Customer attrition cost can have different values depending upon your context: Cost of customer attrition is not a balance sheet or Profit & Loss item. Most of the time it also not a part of the management accounting. Therefore, it does not have a fixed and non-negotiable formula which needs to be used consistently for calculating its value. In this page we will share on what can be those different shades and in which context they should be used.
• Customer attrition cost is not only hard figures but can also have soft impacts, which may be partially or totally un-quantified. For example- impact on the brand value or impact on the sales staff morale.

The purpose of this page

To provide you all the components, which make-up the customer attrition cost so that you can calculate your customer attrition cost in your own context

Components of the cost of customer attrition- Hard Elements

Here is the list of the elements, which add to the total cost of attrition, as and when a customer leaves you:

Customer Acquisition cost

Most of the organizations work on the formula of higher spending upfront on customer acquisition, and build the profits out of the customer over a period of time. In other words, in most of the businesses, the customer is unprofitable in first few months (or sometimes years like in life insurance industry). These acquisition costs go up with the level of competition and size of the market. Sometimes, companies spend more than usual acquisition cost to snatch the customers from the competition (for example- balance transfer from existing loan with the competition at lower interest rate). Here are the elements of the acquisition cost.

• Customer Acquisition Sales cost: This includes the cost of your entire sales and distribution machinery. It includes sales staff, sales offices, sales distributors, advertizing, promotion etc...
• Special discounts or offerings given to get new customers: Over and above the sales machinery, companies run sales campaigns, offering special discounts, and services to acquire new customers (free gift coupons, free talk time, first year vehicle maintenance free...)

Initial Customer training and Product Introduction

The effort spent on the customer in the initial period is high. Examples are-
              

• Introduction call with relationship manager
• Product manual and introduction kit
• Product usage training session

Customer set-up costs

As you acquire a customer, you set it up in your systems, and processes. This includes:

• Opening the customer account in your systems
• Finalizing the contractual and other formal documents for the business relationship

Warranty Cost

The initial period of the product sales is typically associated with the warranty, which provides free of cost repairs of any product issues. This is an over-head. Typically company expects to earn future incomes by providing paid service and support.

Customer settling down Cost

In the area of services sector, after acquiring a customer, a company may need to spend extra effort in the initial few months, to ensure that customer does not exit early. There is a general business rule that a customer goes through a dissonance period in the initial stages. Once a customer get used to your services, it’s easier to retain.

Loss of Customer Value Cost

Customer relationship value is what offsets your spending on acquiring a customer. Every company in its pricing and financial calculation assumes the money which a customer will bring-in through his relationship. There are also assumptions related to the longevity of the customer with the company. An organization, if needs to be competitive in terms of product pricing, will need to assume a higher customer relationship and longevity. If a customer attrites faster compared to your actuarial/financial assumptions, it will hit your profits. The components of the loss of customer value are

• Loss of customer lifetime value cost
• Lost of customer current relationship value cost

Customer Exit cost

Sometimes the customer attrition has a cost attached to take the customer out of your systems and processes. This cost can be large for strategic customers. There are also the processes which you have to follow to close the customer account.

Costs related to managing of Work-in-progress items

• Re-using the inventory ready to be shipped to the customer
• Stopping and canceling the purchase orders in processing
• Closing the projects currently in progress from the customer premises
• Cost related to re-deploying the resources (people on the bench)

Legal Costs

When exiting with a customer, there may be legal complications like unpaid dues, disagreements on following-up on   the exit-clauses in the contract

Components of the customer attrition cost- Soft Elements

Employee Morale

Every organization is and should be prepared for some level of customer attrition. As mentioned before, some part of the customer attrition can be healthy or is inevitable. However, customer attrition beyond the expected levels or industry benchmark demoralizes your employees. The reason is not as much related to the customer leaving, but low-quality processes and customer-unfriendly culture, which makes people uncomfortable. There is a saying that the "happy employee leads to a happy customer'. The reverse is equally true ' A happy customer leads to a happy employee'. Customer retention and satisfaction is the true indicator of the level of confidence and robustness within an organization.

Bad References

"A happy customer brings in ten more customers, and an unhappy customer takes away 100 potential customers". People talk more when they are unhappy. In politics there is a term called anti-incumbency, which states that people generally vote when they need a change. People who are happy with status quo do not care to vote that much. The same principle applies on the customer dissatisfaction.

Reputation Impact

High level of prolonged customer attrition leads to fundamental impact on the brand perception, which is biggest cost a company end-up incurring. Build a brand reputation and losing it takes years. A lost brand value takes decades to re-build.

TIP- Some tips on considerations for calculating customer attrition cost

The problem with calculating customer attrition cost is that most of the components are defined by the human judgment. Therefore, no two people will be having same customer attrition cost perception for a given situation.  Here are some tips you can use to create a realistic estimate:

• Don't inflate the components of customer attrition cost. Be on the conservative side.
• Don't make the calculation of customer attrition cost over-complex. Go for averages. For example, I will avoid calculating different acquisition cost as per the location, customer segment etc. You may have some segregation, but keep it limited. One has to keep in mind that customer attrition cost is best guess and not a figure for your financial statements.
• When we talk about the customer value cost, please take the current relationship value with a small add-on for lifetime value. Life time value in most cases is a hazy number (with exception of sectors like Life Insurance and Banking...), where the customer can switch easily.

The overall message is that don't oversell your customer retention and satisfaction initiative by inflating customer attrition cost and therefore making a positive business case.