======Attrition Rate======
Attrition Rate (often called [[Churn Rate]]) is a crucial metric that measures the percentage of customers or subscribers who stop using a company's product or service over a specific period. Imagine a business as a bucket you're trying to fill with water (customers). The attrition rate is the size of the hole in the bottom of that bucket. A high rate means you're losing customers as fast as you can find them, forcing the company to spend heavily on marketing just to stay afloat. For a [[Value Investing]] practitioner, this is a major red flag. Conversely, a low attrition rate signals a "sticky" business with happy, loyal customers. This often points to a strong [[Competitive Advantage]] (or [[Moat]]), allowing the company to generate predictable [[Cash Flows]] and grow sustainably over the long term. It's not just about losing customers; it's about what their departure says about the fundamental quality and durability of the business.
===== Why It Matters to a Value Investor =====
Value investors are obsessed with finding high-quality businesses that can stand the test of time. The Attrition Rate is one of the best vital signs for a company's long-term health.
A **low attrition rate** is a beautiful thing. It suggests:
  * **Customer Loyalty:** Happy customers don't leave. This satisfaction often translates into a strong brand and pricing power—the ability to raise prices without sending customers running to a competitor.
  * **A Wide Moat:** Why are customers staying? It could be high [[Switching Costs]] (it’s a pain to change banks), a superior product, or a unique network effect. Whatever the reason, it's a barrier that protects the company from rivals.
  * **Efficiency:** A business with loyal customers can spend less on marketing and sales. It’s far cheaper to keep an existing customer than to acquire a new one. This leads to higher profitability and a lower [[Customer Acquisition Cost]] (CAC).
A **high attrition rate**, on the other hand, is a leaky bucket that can sink an investment. It signals:
  * **A Weak Business Model:** The company might be competing solely on price, offering a subpar product, or facing intense competition.
  * **Unsustainable Growth:** The company is on a "customer acquisition treadmill," spending aggressively to replace those it loses. This can mask underlying problems and eats into profits.
===== Calculating Attrition =====
Figuring out the attrition rate isn't rocket science. It's a simple percentage that tells a powerful story.
==== The Basic Formula ====
The most common way to calculate customer attrition is:
**(Customers Lost During Period / Customers at Start of Period) x 100 = Attrition Rate %**
For example, if a streaming service starts the quarter with 1,000 subscribers and 50 of them cancel their subscriptions, the calculation is (50 / 1,000) x 100, which equals a 5% quarterly attrition rate.
==== A Practical Example ====
Let's look at "SaaS-y Software Inc."
  - It started the year with 5,000 business clients.
  - Over the year, 250 clients did not renew their subscriptions.
  - Attrition Rate = (250 / 5,000) x 100 = 5%
This means SaaS-y Software Inc. has an annual attrition rate of 5%. The company needs to acquire at least 250 new clients just to break even on its customer count for the year.
===== Putting Attrition Rate in Context =====
A number like "5% attrition" means nothing in a vacuum. A savvy investor always asks, "Compared to what?"
==== Industry Benchmarks ====
A good attrition rate is highly dependent on the industry.
  * **Software-as-a-Service (SaaS):** A 5% //annual// attrition rate might be considered excellent, indicating a very sticky product.
  * **Telecommunications:** Mobile phone carriers often see much higher //monthly// attrition rates as customers hop between providers for better deals.
  * **Gyms & Fitness Centers:** These businesses famously have very high attrition, as New Year's resolutions fade by March.
Always compare a company’s attrition rate to that of its direct competitors and the industry average. You can often find this information or clues about it in a company's [[Annual Report]] or discussed by management during an [[Earnings Call]].
==== The Story Behind the Number ====
The most important step is to understand //why// customers are leaving. Is it because of:
  * A price increase?
  * Poor customer service?
  * A new, disruptive competitor stealing market share?
  * The product is no longer relevant?
The "why" tells you whether the attrition is a temporary blip or a sign of a terminal decline in the business's competitive position. A great investor digs into the story behind the numbers.
===== Capipedia’s Bottom Line =====
The Attrition Rate is more than just a metric; it's a window into the soul of a business. It quantifies customer loyalty and provides a clear signal about the strength of a company's competitive advantage. For value investors, a business that can hold onto its customers is a business that's built to last. A low and stable attrition rate is often the hallmark of a wonderful company, while a high and rising rate is a clear warning to proceed with caution. Always remember to check the hole in the bucket before you decide to invest.