# Understanding Attrition in Business: Definitions, Types, and Key Benefits

> **Definition**
>
> Attrition in business refers to the gradual but deliberate reduction of a company's workforce as employees leave voluntarily or involuntarily without being replaced.

## What Is Attrition in Business?

Attrition is the gradual reduction in a workforce by natural means. It's a deliberate process that takes place as employees leave a company and aren't replaced. Attrition can be voluntary, as when employees either resign or retire. This is different from attrition involving layoffs, which occurs when a company lets people go without replacing them. Voluntary attrition is seen as less disruptive than layoffs. Attrition can also refer to the reduction of a customer base, often as a result of customers moving on and fewer new customers opting in.

### Key Takeaways

*   Attrition is the reduction of staff as employees retire or resign without replacements.
*   Voluntary attrition often indicates company issues, like unsatisfactory pay or poor work-life balance.
*   Involuntary attrition occurs through dismissals due to poor performance or economic conditions.
*   Demographic-related attrition can signal workplace discrimination and requires management attention.
*   Tracking attrition rates helps companies identify issues affecting employee retention and costs.

## Examining Employee Attrition in Business

Employee attrition refers to the deliberate downsizing of a company's workforce. Downsizing happens when employees resign or retire. This type of reduction in staff is called a [hiring freeze](https://www.investopedia.com/terms/h/hiring-freeze.asp). It is one way a company can decrease [labor costs](https://www.investopedia.com/terms/c/cost-of-labor.asp) without the disruption of layoffs.  

There are a number of reasons why employee attrition takes place. They include:

*   Unsatisfactory pay and/or benefits
*   Lack of opportunity
*   Poor workplace conditions
*   Poor work-life balance
*   Illness and death
*   [Retirement](https://www.investopedia.com/terms/r/retirement.asp)
*   Relocation

> **Fast Fact**
>
> Companies may want to consider increasing training, opening dialogue with employees, and increasing benefits and other perks to help decrease attrition.

## Different Forms of Attrition Explained

### Voluntary Attrition

Voluntary attrition occurs when employees leave a company of their own volition. Employees leaving voluntarily may indicate that there are problems at the company. Or, it may mean that people have personal reasons for departing that are unrelated to the business.

For example, some employees voluntarily leave when they get a new job elsewhere. They may be moving to a new area which makes the commute impossible. They might have decided to try a different career and therefore need a different type of job.

Voluntary attrition can also occur when employees retire. This is also referred to as natural attrition. Unless a company experiences an unusually high rate of early retirements, employees retiring shouldn't be a cause for concern for management.

### Involuntary Attrition

Involuntary attrition occurs when a company dismisses employees due to poor performance or misconduct.

Companies might eliminate positions or lay off employees due to poor economic conditions.

### Internal Attrition

Internal attrition refers to movement out of one department or division and into another. The employee isn't leaving the company. They're simply making a move within it.

For instance, internal attrition can occur when an employee gets promoted to a different management level. Or, they move laterally to a different section with a more suitable job.

Internal attrition might indicate growth opportunities, but a high rate in one department may signal problems that require investigation.

### Demographic-Related Attrition

Demographic-related attrition results when people identified with certain demographic groups depart a company unexpectedly and quickly. These could be women, ethnic minorities, veterans, older employees, or those with disabilities.

Such departures could indicate harassment or discrimination, which undermines a positive workplace and business success.

Action should be taken quickly to understand what caused such departures. Rectifying demographic-related attrition is a must because inclusion should be a top goal of every company. Plus, a company can put a halt to the loss of employees of great value and promise. [Diversity training](https://www.investopedia.com/best-programs-improving-diversity-and-inclusion-in-financial-services-industry-5092350) can help.  

### Customer Attrition

While not related to employee attrition, it's important that a business also be aware of customer attrition.

Customer attrition happens when a company's [customer base](https://www.investopedia.com/articles/financialcareers/06/targetclients.asp) begins to shrink. The rate of customer attrition is sometimes referred to as the [churn rate](https://www.investopedia.com/terms/c/churnrate.asp). Customer attrition can mean that a company is in trouble and could suffer a loss of revenue.

Customer attrition can take place for a variety of reasons:

*   Loyal customers switch their preference to products of another company
*   Aging customers aren't being replaced by younger ones
*   Bad [customer service](https://www.investopedia.com/terms/c/customer-service.asp)
*   Changes in product lines
*   Failure to update product lines
*   Poor product quality

> **Fast Fact**
>
> In June 2024, 3.3 million U.S. employees voluntarily left their jobs.

## Exploring the Advantages of Attrition

Attrition has its positive aspects. By its simplest definition, it's a natural diminishing of the workforce. This can be welcomed when the economy is in bad shape or a recession looms and, if not for attrition, a company would face the prospect of having to lay off employees (when it doesn't want to lose them).

Here are other times when attrition might help:

*   If one company acquires another and must deal with redundancies.
*   If a company redirects its vision toward a new goal and must restructure or reduce the workforce.
*   When new employees are needed to refresh a workplace environment with new ideas and new energy.
*   When a company seeks natural opportunities to better diversify a department or division.
*   When employees with poor attitudes or performance should be removed to improve workplace culture, reduce costs, or make room for new hires who are a great fit.

## Understanding and Calculating the Attrition Rate

The attrition rate is the rate at which people leave a company during a particular period of time. It's useful for a business to track attrition rates over time so it can see whether departures are increasing or decreasing. A change in the attrition rate can alert management to potential problems within the company that may be causing employee departures.

The formula for the attrition rate is:

**Attrition rate = number of departures/average number of employees x 100**

Say that 25 employees left ABC Company last year. In addition, the company had an average of 250 employees for the year ((200 + 300)/2).

With those figures, you can now calculate the attrition rate:

Attrition rate = 25/250 x 100

Attrition rate = 0.1 x 100

Attrition rate = 10%

 To calculate the average number of employees, add the number that existed at the beginning of the time period to the number that existed at the end of the time period. Then, divide by two.  

### The Importance of Tracking Attrition Rates

Measuring attrition rates can help identify issues causing voluntary departures, which are costly when losing valued employees.

For example, the cost to hire and train a new employee when one employee voluntarily departs can be one-half to two times that employee’s annual salary.

Company profits can be affected negatively when knowledgeable, experienced employees leave and productivity suffers.

Loss of customers can go hand in hand with the loss of valued employees. That can mean another hit to profits tied to former employees who understood company products and services, and how to sell them.

## Differentiating Between Attrition and Layoffs

Sometimes, employees choose to leave an existing job to take a new one or because they're retiring. An attrition policy takes advantage of such voluntary departures to reduce overall staff.

 [Layoffs](https://www.investopedia.com/terms/l/layoff.asp) are not voluntary for employees, and attrition occurs if the company doesn't replace all laid-off workers.

Layoffs occur when a company is faced with a [financial crisis](https://www.investopedia.com/articles/investing/041415/investing-crisis-high-riskhigh-reward-strategy.asp) and must cut its workforce to stay afloat.

Sometimes, due to changes in company structure or a [merger](https://www.investopedia.com/terms/m/merger.asp), certain departments are trimmed or eliminated. Rather than relying on natural attrition associated with voluntary employee departures, this usually requires layoffs.

## Comparing Attrition and Employee Turnover

[Turnover](https://www.investopedia.com/terms/t/turnover.asp) takes place in a company's workforce when people leave their jobs and are replaced by new employees. In such instances, there is no attrition.

Employee turnover is generally counted within a one-year period. This loss of talent occurs in a company for many reasons. As with voluntary attrition, employees may retire, relocate, find a better job, or change their career.

Companies can study turnover to make needed changes. For instance, many employees leaving within a short period of time probably signals issues within a company that must be dealt with.

As with voluntary attrition, turnover data can guide management to make improvements for all employees.

## How Does Employee Attrition Differ From Customer Attrition?

Employee attrition refers to a decrease in the number of employees working for a company that occurs when employees leave and aren't replaced. Customer attrition, on the other hand, refers to a shrinking customer base.

## Is Employee Attrition Good or Bad?

The loss of employees can be a problem for corporations because it can mean the reduction of valued talent in the workforce. However, it can also be a good thing. Attrition can force a firm to identify the issues that may be causing it. It also allows companies to cut down labor costs as employees leave by choice and they're not replaced. Eventually, it can lead to the hiring of new employees with fresh ideas and energy.

## How Can I Stop Customer Attrition?

You can prevent customer attrition by making sure that your company offers the products and services that your customers want, provides them with excellent customer service, stays current with market trends, and addresses any problems that arise as a result of customer complaints.

## The Bottom Line

Attrition refers to the gradual but deliberate reduction in staff that occurs as employees leave a company and aren't replaced. Employees may leave voluntarily or involuntarily. Or, they may simply move from one department to another. In that case, attrition occurs when the former department doesn't replace the employee. Employees may also leave for reasons of discrimination.

Calculating and tracking attrition rates can be useful to companies. High attrition rates indicate more people are leaving. They can signal that some problem is causing these departures and must be dealt with to improve the working environment. A certain level of attrition can be helpful because it can avoid the need for layoffs in difficult economic times.

> **Article Sources**
>
> 1.  U.S. Bureau of Labor Statistics. "[Job Openings and Labor Turnover - June 2024](https://www.bls.gov/news.release/pdf/jolts.pdf)." Page 1.