The Silent Killers - Office Products, Market Shrink & Customer Churn

Leaking-Bucket.gifMost business owners and operators intuitively understand it costs much more to win business from a new customer than from an existing customer. Most everyone in business also knows that winning new customers is an expensive and involved process.

Many statistics show that acquiring a new customer generally costs at least 5x more than keeping an existing one. Furthermore, statistics also show that the probability of selling something to an existing customer is 60-70%, whereas the chance of selling to a new prospect is 5-20%.

All businesses should consistently measure and monitor customer churn and acquisition rates.

There's an actual customer acquisition cost (CAC); the higher the churn, the lower the lifetime value (LTV) of customers, and the lower the return that's earned.

This article will consider these critical performance indicators for the typical small reseller of office products and supplies in the North American market.

Customer Churn Rate:

Churn is the amount of revenue a business turns over each year. For high unit cost product-oriented companies, where customers buy once and don't buy again for years, or perhaps ever (i.e., autos), churn rates are very high - near 100%. For companies in recurring revenue businesses (i.e., office products and supplies), the churn rates, along with average order size, should be much lower.

The actual churn rate for a business can be calculated by determining the retention rate and subtracting it from 100.

Put the formula for calculating churn is as follows:


So, as an example, 150 customers minus six new = 144 divided by 160 = 90%

Subtract 90% from 100% means the annual churn rate = 10%

Most business owners are unfamiliar with this formula. If churn is calculated at all, then there's a tendency to believe it's estimated from a more straightforward procedure that fails to account for any new customer acquisitions during the preceding 12-month period.

For example, 150 (current customer count) divided by 160 (customer count at the start of the 12 months) = 93.75%. Subtract 93.75% from 100% = 6.25%. In this incorrect calculation for churn, new customer acquisitions are disguising the actual churn rate of 10%.

A business with 150 customers experiencing 10% churn will have less than 100 customers within four years!

Market Shrink:

It's clear churn can be devastating to a business, but, unfortunately, it's even more of a problem for the office products industry when combined with a market shrink.

Overall, the shrink in market size for office supplies is insignificant. A $25 billion market in retail dollars is shrinking at a little more than 1% per year. However, the real impact of shrinking to the aftermarket is much more severe when you look at the segmentation between monochrome and color in the supply market.


The aftermarket has a 30% share of monochrome and an 8% share of color. The mono market is shrinking at nearly 5% per year, and the color is increasing at around 2% yearly.

Because the aftermarket has an unequal share of the two market segments and its most significant percentage is in the fastest contracting segment, its market is shrinking nearly 3X faster than the overall market.

Unless the aftermarket resellers can increase their share of the color market, they're facing a 3% annual market contraction that must be added to their customer churn rate.


In the above example, a reseller starting 2016 with $650,000 in annual sales and a 10% churn rate will see its revenue halved by the end of 2020 when churn is combined with the weighted impact of market shrink.

To avoid this potentially devastating outlook, the churn rate must be reduced, and the customer acquisition rate on new businesses (particularly color) must be increased.

Customer Acquisition Rate:

Now, for businesses with high customer churn rates, they are likely to have low customer acquisition rates. There's usually a reason for high churn - poor quality, inadequate value proposition, lack of customer engagement, poor market knowledge and intelligence, etc. These reasons for high churn are usually why new customers can't be acquired. 

Most of the time, there's a high inverse correlation between churn and acquisition - as churn reduces, then addition increases, and vice-versa.

It's simple to calculate your acquisition rate:


So, as an example, 150 customers minus six new = 144 divided by 150 = 96%

Subtract 96% from 100% means:

The annual acquisition rate = 4%

It should be clear that if you're a business with churn rates greater than your acquisition rates, your business is shrinking. By fixing the underlying causes for the high churn rates, you can usually expect to increase your acquisition rates.

Customer Acquisition Cost (CAC):

How can we measure the customer acquisition cost? Like the other calculations I've explained above, it's simple when you know how.


So, as an example, sales expenses divided by six new customers

($650,000 x 40% =$260,000) = Sales Expense

$260,000 / 6 = $43,333

In this example, the CAC is $43,333

Life Time Value (LTV):

Now I've explained the methodology for calculating customer acquisition cost; it's possible to calculate the Life Time Value of a customer.

Step 1: Calculate the expected lifetime of the customer in years - this is easy; divide the churn rate into one - i.e., 1 / 10% = 10 years

Step 2: Multiply the average customer revenue per year by the expected lifetime - i.e., $4,333 x 10 = $43,333

Step 3: Multiply the 10-year revenue by the average Gross Margin - i.e., $43,333 x 35% = $15,167

In this example, the LTV is $15,167

So what does all this mean?

Well, it shouldn't take a genius to understand that a business will fail if its cost to acquire new customers ($43,333) is more significant than its ability to monetize those customers ($15,167). As shown in Example 1 below, the CAC exceeds the LTV, and the red line displays an "out-of-balance" business model.


Now let's focus on Example 2, shown in the chart above.

This chart has the same underlying assumptions as Example A, except churn is reduced, and acquisition is improved - remember, I already pointed out these rates usually move inversely. By fixing the problems underlying the high churn rate, churn comes down, and acquisition goes up!

In Example 2, churn is reduced to 4%, and acquisition increases to 29%. As a result, the Cost of Customer Acquisition decreases to $5,200, and the Life Time Value increases to $33,456. Now we have an excellent ratio between CAC and LTV, as displayed by the green line signifying a sustainable business model!

The table below summarizes the data I've used for the above explanation.



The "silent killers" of churn and shrink in the office products industry. The analogy from the healthcare industry and its constant reminder of the dangers of high blood pressure is quite deliberate.

You can reduce blood pressure and live much longer by changing your lifestyle. You can reduce churn and have your business survive much longer by fixing the underlying causes of customer churn in your industry.

Of course, quality, value, and customer service are all vital for customer retention. But other factors increasingly come into play in our modern digital world and must also be considered.

Leave your comment