Imagine two skin care companies. We sell the cream for $50 and the average customer usually buys it once. Another sells a cream for $50 and customers buy it once a month for a year. Assuming that the two companies and the products are the same, who has the better company?
A second company, of course. Its customer lifetime value (CLTV), or the amount a customer spends with a company during their relationship, is much higher. Instead of a new customer worth $50 (purchase), a new customer is worth 12 times: ($50 x 12), or $600. This means that more money can be invested in customer acquisition, as well as customer and product development.
The difference between these two companies is the cost of e-commerce. Knowing (and understanding why) churn can help a business measure how it’s doing against the competition, and it’s an example of customer retention, which affects profitability and revenue. . According to a Bain & Company report, “A 5% increase in customer retention produces more than a 25% increase in profits.”
What is churn?
In business, “churn” occurs when a customer no longer comes back.
The word has its roots in bread: to “stir” milk or cream is to stir it (by stirring it or turning it) until it becomes something else: butter. Take that and put it into business. If you make your customer angry, you may annoy them (or leave them), so they turn to another option: the competition.
Churn is often measured in subscription-based e-commerce businesses. Since these types of businesses often use recurring payments, it is obvious that the customer leaves the payment repeatedly, which is like a subscription.
For e-commerce transactions without registration, your customers will not have a trackable time when they leave. But that doesn’t mean you don’t have a subscription. There is a certain percentage of customers who will not buy from you again, and understanding this number is very important for your business.
How to Calculate Churn Rate
There are several ways to calculate churn rates depending on the type of business.
For subscription-based e-commerce businesses, the churn rate is easy to calculate for a given calendar window (every month or year), using customer cancellation times:
(Clients at the beginning of the period – Clients at the end of the period + New clients acquired during the period) / Clients at the beginning of the period.
It is important to note “New customers acquired during the period” in this process. If you look at the total turnover of your customers during that period, it is possible that the new customers obtained from your online store are “hiding” your customer base. is real. This method, as mentioned above, avoids falling into this research trap.
For example, if you have 100 customers on October 1, 105 customers on October 31, and get 10 customers during the month, your break for the month of October will be 5%:
(100 – 105 + 10) / 100 = 5 / 100, or 5% of the number
Most Shopify subscription apps will calculate this for you using the same formula.
Regular e-commerce companies
There is both confusion (and debate) about how a non-subscription online store should measure churn. This may seem like a long process. After all, the customer may be using technology to come back again and again, right? So how can we really say that they have churned the teeth?
Of course, you can’t be 100% sure. But you can create a simple model to report churn with confidence. For this, proceed as follows:
Understand your average buying pattern. In other words, on average, how long does it take for a customer to make another purchase? To find it, take the orders of your regular customers and measure the average number of days between their orders. If you don’t have a lot of historical data, you can interpret it based on what you know about your customers’ behavior.
Use customer groups instead of canceling windows. With subscriptions, you can calculate churn rates based on when a customer cancels, making them a customer. For example, you can see that the churn rate in October 2022 is 5% based on customers who canceled in October. But businesses that don’t have active cancellations can’t scale that way. Instead, you’ll group customers based on their first purchase date and any subsequent events. This is called “one”. For example, you can define a customer group as all customers who purchased in January 2021, and analyze that group over the next 12 months.
With these two concepts (average time to purchase and customer), you can confidently measure e-commerce churn over time:
For each customer group, their churn rate is the percentage of customers who never order again
For example, take a look at the skin care business scenario. Now, let’s assume that the average buying time is three months. You can measure churn for January 2022 membership in three ways:
- Check out the customers who placed their first order in January 2022.
- Then, look at the percentage of those customers who ordered in the next six months (by the end of July 2022).
- If they have 1,000 customers in January 2022, and 300 of them order again in the next six months, the team will have a 70% rate.
Measuring churn based on teams can unlock powerful insights into customer engagement, especially if you’re adapting products or customer services across different teams. If you have a Shopify store, you can improve retention rates by creating customer groups based on customer engagement or non-engagement.
What is the average customer churn rate?
Churn is always industry specific. Some product types tend to have low churn, or “stickiness,” because they keep customers coming back, while others tend to have high churn, because customers buy it when they need it. However, to give a reference to all e-commerce stores:
For subscription businesses, a monthly churn rate of 5% would be considered average, according to Recurly’s analysis.
For a one-time purchase business like skin care or fashion, about 75% churn per unit would be considered average. This means that the average jewelry or clothing e-commerce store can expect around 25-26% repeat customer purchases.
Three ways to reduce churn
Customer retention strategies can improve churn and retain customers in three ways:
- Product experience
When a company has a negative problem, they often look at everything but the product itself. If you have a higher than average churn rate for your industry, your product may not be meeting your customers’ expectations. How do you improve that experience? Start by conducting customer interviews and conducting customer satisfaction surveys to see if your customers like your product (and think it’s worth the price). Nothing builds customer loyalty like having your product provide a great customer experience.
- Organize your purchasing cycle
Whether your business is a subscription-based model or sells a one-time purchase product, one of the most common reasons for criticism is not connecting timelines to customer behavior. For subscriptions, this means offering different time options for the regular redemption process. If it takes a customer six weeks to finish using your product, make sure they have a six-week cycle option (and a 12-week option for intermittent use). Likewise for one-time buyers, make sure that the auto-shopping email reaches the customer at the right time.
- Customer Service
Great customer service cannot improve churn, but poor customer service can make it worse. It only takes one bad conversation with the customer support team or one order delivered to the wrong place for a valued customer to say, “I’ll try somewhere else next time.”