Churn rate is a critical ecommerce metric that, when not managed correctly, can cost retailers up to $136 billion annually. This guide explores the ins and outs of churn rate to help you grow your ecommerce business in 2023.
We discuss what a healthy churn rate looks like and how to calculate it, as well as how to reduce it and the impact that churn rate can have on customer acquisition cost and business income. By the end of this guide, you will be armed with the tools and knowledge necessary to manage the churn rate in your ecommerce store effectively.
We'll also explore why churn rate is a crucial metric for ecommerce stores and how it can be used to inform decisions around marketing, customer service, product development, and more. So get ready to dive in – your ecommerce success awaits!
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What is Churn Rate?
Customer churn - also known as customer attrition, occurs when customers stop buying from your business. The churn rate is expressed as a percentage of these customers over a period of time.
The churn rate metric indicates how effective the company is at retaining customers. This metric is commonly used among subscription-based businesses. However, churn rate is important to every type of business, non-subscription-based ecommerce businesses included.
With rising competition and advertising costs, acquiring new customers is becoming more expensive. Meanwhile, it’s generally 5 to 25 times cheaper to retain a new customer than it is to acquire a new one.
So you can see the importance of actively monitoring and reducing the customer churn rate of your ecommerce store. As a seller, you want to understand why customers are not returning. There are aspects you can influence to increase the likelihood of them repeat customers.
Also note: Not all churn points to something you need to change, and a 0% churn rate is not realistic - some customers may churn due to a change in their own personal circumstances, such as changes in their financial situation or moving to a different location.
To the extent that the company can control it, reducing churn can be crucial to increasing revenue and scaling up the business.
Calculating Churn Rate
To calculate churn rate, you first need to define the time frame you want to calculate your churn rate. That is typically a month, a quarter, or a year.
Then, determine the total number of customers at the beginning of that time frame and the number of customers at the end.
Plug these two numbers in the below calculation and you’ll have your customer churn rate.
Churn rate = [(# of customers at the beginning of the time frame - # of customers at the end of the time frame) / # of customers at the beginning of the time frame] x 100
If you’re calculating the monthly churn rate, you would need the total number of customers at the beginning of the month and the number of customers at the end of the month. Let’s say those numbers are 10,000 and 7,200, respectively. Here’s how the churn rate calculation would look like:
Monthly churn rate = [(10,000 - 7,200)/10,000] x 100 = 28%
Is 28% a good or lousy churn rate? Let’s see what makes the distinction between the two.
What's a Good Churn Rate?
Well, there’s not one golden value that acts as the good-rate-threshold.
What’s considered a reasonable churn rate will depend on several factors like your industry, product price, and product lifecycle.
Let’s first see a reasonable churn rate for non-subscription-based ecommerce businesses.
People buy makeup products more routinely than new laptops. So it makes sense that the Beauty and Fitness ecommerce industry has a higher lifetime retention rate (lower churn of around 73%) than the Consumer Electronics industry - as shown in the graph below. While the Consumer Electronics industry has lower retention and a higher churn rate (81%), it also has, on average higher priced products.
That’s to say, consider all these factors when analyzing your churn rate.
Looking at the historical retention rate data from the graph above, we can see that a non-subscription-based ecommerce business has, on average, a churn rate of around 70-80%.
The story is different when it comes to subscription-based ecommerce businesses. Subscription-based businesses have an average churn rate of 5.57%.
Ultimately, you should always aim to lower the churn rate.
Why Does Customer Churn Happen?
Do you have a hard time retaining long-term customers? Here are a few reasons why that might be happening:
Poor Quality of Products
This one is simple. Customers will be disappointed if the product doesn’t deliver the promised quality. It’s unlikely they will come back; it’s more likely they will switch to a competitor and leave a bad review.
To mitigate the risk of user churn due to poor product quality, ecommerce businesses must find high-quality products to sell, identify areas of improvement, and ensure that the product's perceived value matches its price tag.
Presence of Competitors
Nowadays, customers have more options than ever before. They can easily compare products and services from multiple companies, making it easy for them to switch to a competitor due to lower prices, better quality products, more features, or better customer service.
These incentives can make it very attractive for customers to switch to a competitor, even if they are satisfied with the current business. Price is the number one reason behind customer churn in the US, even though emotional factors like loyalty are increasingly important.
For these reasons, ecommerce businesses must keep track of the competitive landscape and conduct continuous seller competitor research. Amazon sellers can automate their competitor research with the Competitor Tracker for Amazon. The tool will send weekly reports on competitors’ product sales, changes in SERP and search rank positioning, and any changes to their listings and ad content.
Difficulties During the Buying Process
Difficulties during the buying process can start when customers search for a product online - Is your product listing visible? Once the customer moves to the next step in their journey - Does your listing provide all the information they need to make a decision?
The checkout process can be another factor in user churn. For instance, 23% of customers will only be able to continue the buying journey if they are obliged to create a customer account. Not to mention, customers might also churn involuntarily, such as due to payment processing issues. But it doesn’t end there. The buying process continues after that “Purchase Confirmation” email.
It should be easy and simple for customers to purchase from your online store. This is part of the customer experience and entails the entire buying process.
Steps to Reduce Customer Churn
Now to the most important part, how to reduce customer churn:
Improve Your Services
82% of US consumers stopped buying from a business after a poor customer service experience. That shows that the product is only one part of your ecommerce offer.
Improve the different services you offer to enhance your product’s value and reduce churn. Besides customer service, you can also focus on your shipping, delivery, and return process.
Selling through Amazon FBA takes care of this for you. FBA sellers offer faster shipping times and better customer support. For these reasons, sellers have seen a 37% uplift in sales after switching to Amazon FBA.
Analyze the Purchase Chain
The ecommerce customer journey refers to the stages a customer goes through when interacting with an online store. The journey typically goes like this:
- The customer will initially become aware of a product. For instance, by searching for “electric lint remover” on the Amazon search box, the customer will become aware of all the different solutions. As a seller, you should analyze if you are there in this first step of the buyer’s journey.
- Then the customer will show interest in a product by learning more about it and the seller.
- If the customer likes what they see, they will then evaluate the product against alternatives. In this stage, the customer looks at factors such as product price, shipping information, and customer reviews.
- Next, when they’ve made a decision, the customer moves to the purchase phase to complete the online transaction.
- Then, there’s the delivery stage.
- Ultimately, during the post-purchase phase the customer may reach out to customer support, leave a review, or make a repeat purchase.
Here are 5 tips to help you simplify the customer’s buying process in each step of their journey:
- Be easy to find
This requires showing up in search results when customers are looking for your products.
- Increase the visibility of your products organically by analyzing search performance using Search Insights for Amazon.
- Make use of Amazon advertising to boost visibility. The PPC Optimizer for Amazon can help you launch profitable ads in no time.
- Facilitate the customer decision-making process
Your product listing should provide all the information customers need to evaluate their options and make an informed purchase. This means that your listing should have a robust product description highlighting all product benefits and features, information regarding product warranty & support, A+ content, and an FAQ or Q&A section.
- Use the Listing Quality Check for Amazon to examine your Amazon listing and receive practical recommendations to enhance visibility and conversions.
- Streamline the checkout process
Here are a few ways you can achieve that. Make it easy for customers to subscribe and schedule repeat deliveries. Amazon customers can set up a new subscription in just a few clicks.
- Offer a guest checkout option
- Provide multiple payment and shipping options - make sure to deliver on your promises
- Conduct user testings to detect any issues that may arise
- Implement a “One Step Checkout” solution that keeps the entire checkout process on one page
- Elevate the delivery experience
An often neglected stage, this is your opportunity to “wow” the customer. First, ensure that you have the basics right: ship the product on time, provide delivery updates, and handle the product with care.
Nordic Oil has fully grasped how to go the extra mile in this part of the buyer journey. They understand the importance of a good unboxing experience; the company includes an informational booklet, mentions their socials, and sends free product samples, and even a discount code - making the customer already think about their next purchase.
- Don’t neglect the post-purchase experience
Amazon sellers can choose to provide support and answer product questions well after the customer has finalized the purchase. That’s how you incentivize loyalty and repeat customers.
Analyzing your purchase chain from beginning to end can uncover improvement opportunities. Aim to delight customers in every step of the buyer journey to build loyalty and reduce churn.
Introduce Loyalty Programs
Loyalty programs incentivize customers to continue doing business with your company. So they should be at the heart of your customer retention strategy.
Additionally, these programs can help create a sense of community and customer engagement.
Loyalty programs can take many forms, such as rewards for repeat purchases, exclusive discounts, or special perks for members.
A customer membership program incentivizes and rewards repeat customers. It’s very simple how it works.
Most brands offer free-to-join membership programs. Take, for example, the loyalty membership program of the Douglas Beauty store. They make the advantages of membership very clear.
It doesn’t cost a thing to the customer to earn those benefits - they simply have to continue purchasing from the Douglas store. So even though customers can find the same products elsewhere, they will be incentivized to purchase from Douglas to collect loyalty points and get rewarded.
The key to running a successful membership loyalty program is to make the incentives worthwhile. Think of personalized tips, access to exclusive content, special discounts, collecting points, and earning rewards.
While rare, some ecommerce brands with a loyal customer base offer Premium loyalty programs where customers have to pay to participate. Douglas Beauty is one of them. Premium Card holders access an even more exclusive set of advantages for a yearly fee.
However, the actual win for the company is not in the yearly fee it charges. The true win lies in having customers commit monetarily to continue purchasing from them.
Implementing a paid membership program can be trickier. Amazon Prime is a successful example of a paid membership program. The benefits of being a Prime member include things that ecommerce customers deeply value: free shipping and express delivery. You can implement such a program by offering perks that customers value and justifying the price of the membership.
Giveaways are promotional campaigns in which businesses can offer free products, discounts, or other incentives to customers as a way to promote brand loyalty. These programs are perfect for engaging your existing customers to prevent them from churning and attracting new ones.
Giveaways are like a game. You chose your marketing channel, rewards, and the game's rules: the number of winners and how the customer will participate.
Let’s go into each of them in detail:
- Marketing channel - Where are you going to announce your giveaway? Ideally, it should be a channel with an already-built audience to help spread the word. Alternatively, you can collaborate with a bigger brand or influencer and leverage their audience. That’s what the ecommerce jewellery brand Frasier Sterling did by hosting a giveaway with Colourpop, a make up brand with over 10 million Instagram followers.
- Rewards - Choose rewards that attract your ideal audience and incentivize them to become customers. For instance, since Colourpop is an ecommerce beauty brand, the reward they have offered in the above example is a makeup product; Frasier Sterling as a jewelry brand has offered a gift card for customers to spend on their online store.
- Rules of the game - What the customer have to do to participate in the giveaway? Enter 3-4 rules, which can be: the customer has to follow your page, like the post, comment, and tag 2 friends. The winner is typically more than one person, and the tagged people are included - this is an excellent word-of-mouth marketing strategy.
Collect Customer Reviews and Get Feedback From Customers Who Churned
Why are customers churning? Ask them.
Reviews and feedback from customers who have churned can help identify and improve product shortcomings and other bottlenecks in the buying process.
That’s why you should be proactive with collecting customer reviews regularly. Good reviews are great. Bad reviews are how you become great.
Negative reviews can be an opportunity to build customer loyalty. Address the issue the customer has and contact them to offer a solution. Then, go one step further to send a survey after each support interaction to evaluate their experience.
You can ask for feedback during churn if you run a subscription-based ecommerce business. Add a simple question at the end of the subscription cancellation process to inquire about why the customer decided to leave.
Collecting feedback is one thing. The most important part is what you do next. Take the feedback you receive from customers who have churned and use it to improve your product and service.
It’s also important to show customers that you care. Thank them for their feedback, and show how you are actively working to improve your brand.
Collecting customer reviews and feedback is an important aspect of understanding your customers, their needs, and what drives them to stay or leave.
What Does a Healthy Churn Rate Mean for Your Business?
In this section, we go over how a healthy churn rate can reduce the cost of acquiring new customers and improve the bottom line of your ecommerce business.
Lower Acquisition Cost
A healthy churn rate can offset customer acquisition costs by increasing the lifetime value of customers and reducing the need for new customer acquisition. When retaining customers and not losing them, you don’t have to spend as much money and resources on acquiring new customers to maintain and grow your business.
As we saw above, many strategies for reducing customer churn focus on building loyalty. This can help reduce the need for paid customer acquisition efforts, as word-of-mouth recommendations can be a powerful driver of new customer acquisition.
Increased Business Income
A 5% increase in customer retention more than doubles business revenue.
You retain more customers over time when you have a lower churn rate. This means that you can expect more revenue from each customer over their lifetime. Besides a boost in revenue, a lower churn rate also leads to cost savings from reduced customer acquisition efforts.
A healthy churn rate can help increase the lifetime value of customers, reducing the need for new customer acquisition and improving customer loyalty and the bottom line. Additionally, regularly monitoring and analyzing churn data can provide valuable insights into customer behavior and preferences.
Businesses can effectively reduce their churn rate by focusing on customer retention and implementing strategies such as loyalty programs and product and service improvements.
With the right strategies in place, you can keep your churn rate low and build a loyal customer base that will drive the growth and success of your ecommerce business.
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While reducing churn rate is essential, it’s not enough to just focus on that. You need to optimize your customer acquisition cost too. Learn more about how you can calculate and reduce the CAC of your ecommerce business.