Attrition is the steady decline of your customer base over time. It occurs naturally due to merchants closing or changing processors for a variety of reasons. Previously, I wrote about three ways to calculate attrition as a means to better manage your business, using merchant count, processing volume and residual payouts as a means of benchmarking your business performance and budgeting for the future. But attrition also governs your life as an ISO (or anyone in the processing business for that matter) in one key respect – how big you can or will become over time.
    Understanding your ultimate potential is the key to determining your future and making decisions today. Hiding in your residual reports is the most important piece of information in your business. It will tell your future far more accurately than any palm reader or horoscope. It’s your attrition rate and your monthly average sales volume as measured by the number of merchants successfully added to your portfolio each month. I am taking a strict definition of active merchants here – do not count merchants who never go live, but only the ones who sign up and process successfully. Volume and stability are everything here.
    If you calculate your attrition rate accurately using merchant head count as your standard, the formula is: (beginning merchants – ending merchants)/ beginning merchants) then take that number and divide it into the number of merchants who go live and process each month, you will get the number of merchants which will eventually be in your portfolio.
    Let’s say you had 100 merchants a year ago, and out of that same 100, you now have 80 remaining. (100-80)/100 = 20% headcount attrition per year. This is a typical number for a small merchant portfolio. Remember that when calculating static pool attrition, you have to disregard merchants added during the period under analysis. If you sold 100 merchants during the year, then your theoretical ultimate size will be determined by the following formula: 100/20% = 500 merchants. This is a theoretical number only. You’ll never really even get that big.
    Another way to look at this is to consider the situation when you do reach 500 merchants. At 20% per year, you will lose 100 merchants per year, which is the same as your sales of new merchants during this period. In short, you will be treading water, neither growing nor shrinking, but pedaling fast to stay in the same place.
    Your current sales capacity determines your ultimate size, and you can predict that ultimate size with accuracy. This information can give you a basis for understanding the future of your business and let you make decisions now that will influence that outcome.
    You can also determine how long it will take to reach your ultimate size assuming everything stays the same as it is now. Below is a chart showing how long it will take to reach the ultimate theoretical destination of 500 merchants selling 100 per year.
    I ran out of room for this chart, and still never hit that theoretical limit of 500 merchants. That’s because, as you can see from the trend lines in the chart, you never quite get there. In fact, after 10 years of this level of sales production, you would have about 350 merchants in the portfolio. It will take forever, almost literally, to reach 500 merchants.
    Check that last line of the chart – each year you are putting in the same work, hitting the same number and your NET productivity is declining each year. The NET value of what you created in each year is less than the year before.
    There’s an old saying in this business: “If you are not growing, you are dying.” The truth of that statement is based on their numbers in the chart above. The are two ways to deal with this cruel mathematical reality: one is to grow your sales volume each year, the other is to transfer the value you create in your merchant base into an asset with more durability – like cash, and that means selling your merchant base.