How to Calculate & Reduce Churn Rate in E-commerce in 2024?
According to Superoffice, businesses suffer a major loss of around $1.6 trillion due to a high churn rate. Acquiring new customers is difficult as well as costly. Stats say bringing a new customer and making them loyal to the brand is 16 times costlier than maintaining an existing loyal customer. It's why businesses must focus on retaining customers and reducing customer churn rates.
But what is the customer churn rate? How does it impact the customer retention rate, and what makes it an important metric in the E-commerce landscape? How to calculate churn rate in E-commerce? This detailed guide will answer all these questions. Furthermore, we will also look into some of the best ways to reduce churn rates in the E-commerce domain.
What Is Churn Rate in E-commerce?
Before we jump into “E-commerce churn rate”, let's first understand what “churn” means in the E-commerce world. Churn means when a customer stops buying the company's service or product. Thus, “churn” in the E-commerce world refers to when customers leave your service.
Churn rate in E-commerce can be defined as the key business metric that measures the percentage of customers who stop using a product or service within a given time period. The higher the churn rate, the higher the number of customers the company is losing over time and the lesser the customer retention is.
Alternatively, it's known as the attrition rate. Churn rate is mostly used for industries and businesses which are highly dependent on repeat purchases, such as subscription-based businesses.
A low E-commerce churn rate signifies customer loyalty. It reflects the effectiveness of an organisation's products, services, and customer support. Again, a high E-commerce churn rate demands immediate attention, signalling potential issues in customer satisfaction or market dynamics.
The average churn rate varies depending on the E-commerce business models and industry. According to Recurly, the average churn rate for subscription based E-commerce businesses is 5%. Similarly, it's around 75% for single-purchase based E-commerce businesses.
According to Omniconvert, the average churn rate in the E-commerce domain based on industry is listed below.
- Beauty & Fitness: 62%
- Apparel: 71%
- Shoes: 78%
- Clothing Accessories: 79%
- Food & drinks: 64%
- Health: 65%
- Sports: 70%
- Electronics: 82%
- Gifts & Special Events: 82%
- Toys & Hobbies: 77%
- Home & Garden: 75%
- Pets & Animals: 70%
- People & Society: 63%
Importance of Churn Rate in E-commerce
In E-commerce businesses, more than half of the customers prefer not to come back after making a purchase. Both high and low values of churn rate are important for the e-commerce business to take necessary steps for their future plans. Let's check the importance associated with churn rate in E-commerce.
1. Measuring Business Performance
The data on churn rate is a powerful metric that helps to measure the health of the customer base. The data validate customer retention, and this information can act as a base for future strategies for effective remedies. Uncover trends in customer churn, enabling businesses to make well-informed decisions.
2. Revenue Impact
Churn directly affects revenue in E-commerce, as losing customers means losing potential sales. Understanding and mitigating churn is crucial for maintaining a steady income stream and ensuring the business's long-term financial health. According to customer data from Gorgias, 21% of their customer base consists of repeat customers, yet these repeat customers contribute significantly, generating 44% of the total revenue and accounting for 46% of the orders.
3. Customer Retention and Acquisition
Businesses can identify patterns and factors contributing to customer attrition by analysing churn rate in E-commerce. The expense associated with gaining new customers is typically greater than that of keeping current ones. In reality, securing a fresh customer in E-commerce can be five times more costly than preserving an already established customer. The data of churn rate is valuable for developing effective customer retention strategies and optimising customer acquisition efforts.
4. Business Forecasting and Planning
The stats of E-commerce churn rate can be used to make serious decisions and future predictions. It is a base for strategic planning, resource allocation, and setting realistic business goals. Churn rate conveys a lot about customer behaviour and service performance, which are foundational to predicting and preventing churn.
5. Customer Satisfaction
High E-commerce churn rates may be indicative of customer dissatisfaction. Additionally, a negative churn rate is a strong indicator of customer satisfaction and product value, suggesting that a business is not only retaining but also maximising customer satisfaction.
We can’t avoid the importance of customer satisfaction in a business. If the company succeeds in improving customer satisfaction by 1 percent, it can result in a significant rise of 5 percent in customer retention rates. The churn data will help understand customer satisfaction points by providing insights into customer behaviour, identifying pain points, and implementing strategies to improve retention.
6. Product/Service Improvement
Understanding why customers leave provides valuable feedback for enhancing products or services. According to a survey, 71% of E-commerce consumers identified poor customer service as the primary factor that prompted them to terminate their association with a company. By consistently examining data and comparing the changing churn rate against established objectives, product managers can pinpoint areas of improvement.
7. Risk Management
Churn is a risk factor in E-commerce that needs to be carefully managed. A consistently high churn rate can pose a threat to the stability and growth of an e-commerce business. Proactive measures can be taken to minimise this risk and ensure the business remains resilient.
How to Calculate Churn Rate in E-commerce?
After understanding the importance of churn rate in e-commerce, the next vital step is to know how to find the churn rate. Calculating the churn rate can be possible by applying a formula.
There are two pieces of information required to do the calculation:
- Number of users present at the beginning of the period.
- Number of users present at the end of the period.
Once we have the information, we can put the values in the formula:
Churn Rate= (Lost Customers ÷ Customers at the Start of the Period )×100
The main information in this formula is the account of the lost customer. Primarily, the churn rate is calculated for a definite period. To determine the churn rate for the financial year, the company needs to know the number of customers at the start and end of the year.
Let's understand this with the help of an example. The company received 7,500 customers at the beginning of the year 2024. By the end, it had 3500 customers. Here, the lost customer count will be 7500-4500= 2500.
After applying the formula of churn rate, the value will be:-
- Churn Rate= (Lost Customers ÷ Customers at the Start of the Period )×100
- Churn Rate= (2500 ÷ 7500)× 100
- Churn Rate= 33.33 %
So, the customer churn rate is 33.33% for the financial year 2024. Companies find the churn rates of various periods and compare the trends to understand the behaviour and patterns.
The above mentioned formula is a simple process to calculate churn rate. Now, let's understand how to calculate this based on the type of business.
Regular E-commerce Businesses
Calculating churn rate for regular e-commerce businesses can be perplexing. Unlike subscription-based models, businesses without active cancellations face a unique challenge. To tackle this, here's a step-by-step guide.
- Start by grasping the average repeat purchase timeline of the E-commerce stire. Analyze the time it takes for customers to make a repeat purchase, either by extracting data from repeat orders or estimating based on behavioral knowledge. For instance, let's say an apparel brand typically sees reorders every three months, that becomes its average timeline.
- Next, employ the concept of customer cohorts—grouping customers based on their date of first purchase. Define cohorts based on the date of first purchase and track their activity over a specified period. For instance, if the average repeat purchase timeline is three months, measure the churn rate of the February 2024 cohort by evaluating how many customers didn't reorder in the following six months. Alternatively, if 40 out of 100 customers reordered within the subsequent six months; the cohort's churn rate would be 60%.
Subscription-Based E-commerce Businesses
Subscription-based e-commerce businesses can calculate churn rate using the formula given below:
Churn Rate = (Customers at the start of the period - Customers at the end of the period + New Customers Acquired in the Period) / Customers at the start of the period
Simply put, it's the difference between customers at the start and end of a period, accounting for new acquisitions. This prevents masking churn beneath the influx of new customers, offering a transparent evaluation.
For instance, imagine having 100 customers on March 1, 110 on March 31, and acquiring 20 new customers in the month. Applying the formula yields a 5% churn rate:
(100 - 110 + 20) / 100 = 10/100, or 10% churn rate.
Causes of Customer Churn Rate in E-commerce
Loyal customers not only contribute to increased business for companies but also influence other potential customers to choose the brand, which is great free advertising for any business. However, there are various reasons why E-commerce businesses lose customers when they are unable to establish this loyal customer base. Let's explore the potential causes behind a high customer churn rate in E-commerce.
Pricing is one of the most influential factors behind customer churn in almost every industry, including E-commerce. Mostly, for online purchases, pricing is a competitive factor; the customer can switch to a different seller within a few seconds.
According to research by FirstInsight, almost 63% of customers consider pricing and deals as the key factors for purchasing through e-commerce sites. It is highly important for the business to find a balance between product quality and pricing where customers get convinced.
2. Product and Service Quality
Almost 44% of customers consider product quality as a factor in making a purchase. If an e-commerce site fails to maintain standardised product quality, then it will eventually lose customers. If the customer faces repeated issues with defects, unreliability, or dissatisfaction, they will lose trust in the brand.
3. Losing To Competition
Customers may switch allegiance if competitors offer superior products, services, or incentives. A study conducted by PwC involved surveying 15,000 consumers, revealing that one-third of customers are likely to switch from a beloved brand following a single negative experience. Regularly assessing and adapting to market dynamics is essential to stay competitive and prevent customer migration.
4. Attracting Wrong Customers
Every business aims to reach a specific audience that genuinely requires its products or services. Attracting the wrong customers is capital waste, and it eventually increases the churn rate. While product marketing, the company must ensure they have high-quality data about the target audience. Customers who are not the right fit for your brand may not perceive any value, potentially resulting in a negative impact on your brand's reputation.
5. Poor Customer Support
Inadequate customer support, such as slow response times, unhelpful representatives, or lack of support channels, can frustrate customers. A positive and efficient support system is critical for customer satisfaction and retention. As per Forbes, 83% of E-commerce consumers believe that effective customer service has the potential to transform them from one-time buyers into loyal, repeat customers.
6. Negative Reviews and Unresolved Complaints
Negative feedback, whether through reviews or unresolved complaints, can tarnish your E-commercebrand's reputation. 97% of individuals claim that negative customer service experiences have altered their buying decisions, while 87% acknowledge that positive reviews have influenced their choices. Customers may leave if their concerns are not addressed promptly and effectively. Managing and resolving issues transparently is essential to mitigate churn.
7. User Experience
A poor overall user experience, whether it's a clunky website, difficult navigation, or complex processes, can drive customers away. Ensuring a seamless and enjoyable user journey is crucial in retaining customers and preventing churn.
Top 7 Ways to Reduce Churn Rate in E-commerce in 2024
According to industry research, businesses can increase profits by 25-35% with just a 5% increase in their customer retention. This is why it's important for businesses to focus on minimising and controlling churn rates. Below listed are the top 7 ways to reduce churn rate in E-commerce.
1. Identify and Analyse the Reasons for Customer Churn
Before jumping into how to reduce customer churn in E-commerce, businesses must work on identifying the potential reasons behind customer churn. These reasons may be many; right from dissatisfaction from product to customer service and many other factors.
One of the best ways to identify these root causes is by improving communication with customers. Customers would prefer communicating with a human agent about their problems rather than just filling out an exit survey.
Thus, whenever a customer is leaving, businesses must focus on building a talk with the customer to explore why they left. This not only helps the business in knowing why the customer left but also makes the leaving customers feel appreciated and valued. Furthermore, E-commerce businesses may also employ advanced analytics to identify the potential causes and their patterns.
2. Segmentation for Improved Customer Experience
After identifying the key causes behind customers leaving the service, businesses must focus on addressing those issues. Segmentation, in this case, helps categorise the customers based on their concerns, which makes it easier for E-commerce businesses to focus on a group of customers having the same issue.
By understanding the unique requirements of each segment, businesses can create customised solutions and communication strategies that resonate with specific customer preferences. This further allows for a more personalised and targeted customer experience.
3. Identify and solve Cancel Triggers
By pinpointing the triggers that prompt cancellations, E-commerce businesses can strategically intervene, addressing root causes and fortifying retention efforts. This involves meticulous analysis of customer feedback, support interactions, and behavioural patterns. This proactive approach allows organisations to tailor solutions to customer pain points, thus enhancing overall satisfaction and reducing churn rate in E-commerce.
4. Ask for Feedback and Reviews from Customers
Encouraging customers to share their thoughts provides a platform for constructive criticism and positive testimonials. This two-way communication not only demonstrates a commitment to customer satisfaction but also allows E-commerce businesses to address issues promptly.
Implementing an efficient feedback loop involves streamlined surveys, targeted follow-ups, and an accessible platform for customers to voice their opinions. The insights garnered from this process empower organisations to make data-driven improvements, ensuring a customer-centric approach.
5. Focus on Improving Customer Service
A seamless and positive customer service experience is instrumental in retaining clients. Ensuring prompt issue resolution, clear communication, and personalised support fosters a sense of loyalty.
Organisations should invest in well-trained and empathetic customer service teams, equipped to address concerns efficiently. Timely responses to queries, effective troubleshooting, and proactive engagement contribute significantly to customer satisfaction.
Furthermore, cultivating a culture of continuous improvement within the customer service department aids in adapting to evolving customer needs.
6. Focus on Proactive and Omnichannel Communication
With a proactive and omnichannel communication strategy, E-commerce businesses position themselves as attentive partners in their customers' journey. This not only enhances customer satisfaction but also establishes a foundation of trust, making it less likely for customers to consider alternatives.
Thus businesses must utilise various communication channels, such as email, social media, and direct messaging, allowing businesses to reach customers where they are most comfortable. Timely updates, personalised messages, and relevant content contribute to a positive customer experience, ultimately reducing the likelihood of churn.
7. Offer Discounts and Incentives
By strategically offering discounts or incentives, companies not only acknowledge their customers' loyalty but also create a tangible benefit for staying committed to their products or services. These offerings can come in various forms, such as exclusive discounts, loyalty points, or special access to promotions.
This approach not only adds tangible value to the customer relationship but also serves as a powerful tool for customer retention. It encourages customers to perceive continued engagement as economically advantageous, fostering a sense of appreciation and satisfaction.
A churn rate in E-commerce is inevitable. A “good” churn rate varies anywhere between 2 to 8%. Furthermore, the average churn rate for the E-commerce industry is around 22%. While churn rate stats vary from business to business, it's essential to track this key metric to ensure that customers keep coming back to your products again and again.
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