Churn rate is an important part of growing a sustainable ecommerce business. Learn how to calculate it and ways to keep your rate low (and your customers happy).
Customer churn (or customer attrition) is a vital metric among subscription-as-a-service (SaaS) SaaS companies and other subscription-based businesses (think Netflix). However, your online store — whether or not you have a subscription-based product — can use churn rate as a way to understand and reduce the rate at which you lose business.
In recent years, ecommerce businesses have realized that rising customer acquisition costs (CAC) have limited the value of new customers. Constantly chasing new customers through expensive ad spend and marketing strategies does not lead to sustainable revenue.
Instead, ecommerce brands have started investing in their customer experience to make existing customers happy, generate more reviews and referrals, and help their bottom line. Data of Gorgias customers shows that repeat customers account for only 21% of customers, but generate 44% of revenue and 46% of orders. That’s why improving your customer retention rate, not just your acquisition rate, should be a top priority.
In this article, we discuss what customer churn is, why it’s important for your online business, and how you can calculate and reduce your churn — thus growing a larger, more resilient company.
What is customer churn rate?
Customer churn rate is the percentage of lost customers your business sees over a given period of time.
Customer churn is a more common metric for SaaS businesses and other subscription-based business models than it is for most ecommerce stores. That’s because those business models can easily spot the moment when an active customer cancels their subscription, or churns.
But online stores without subscription models can approximate customer churn by looking into customer behavior metrics like:
- Negative feedback and customer complaints
- Repeat purchases or lower purchase frequency
- Reduced customer satisfaction (CSAT) or net promoter score (NPS)
Formula for calculating customer churn rate
To perform your churn rate calculation, you need to gather a few numbers. First, you need the total number of customers who were with your business at the beginning of the specific time frame you’re analyzing — this could be at the beginning of a month to calculate monthly churn rate. Next, you need the number of customers that were with your business at the end of the time period you’re analyzing.
For example, if you are trying to calculate churn over a one-month period, you need the number of customers at the beginning of that month, and the number of customers at the end of that month. Once you have these two numbers, you can plug them into this customer churn rate formula: [(customers at the beginning of the time period – customers at the end of the time period) / customers at the beginning of the time period] x 100 = customer churn rate (%)
Here’s an example of how this could look: [(5,000 customers on 1st of month – 4,800 customers on 31st of month) / 5,000] x 100 = 4% churn rate
What is revenue churn rate?
Revenue churn rate is a metric that measures changes in your store’s incoming revenue from existing customers. For businesses that sell standalone products rather than subscription-based products, revenue churn may be a more accurate indicator of your ability to retain business.
Revenue churn rate is also easier to conceptualize and measure because you’re measuring changes in revenue from existing customers, which is a clear-cut number for every type of store, not changes in existing customers themselves.
You can look into your gross revenue churn rate, which just measures the amount of revenue lost from existing customers, or net revenue churn rate, which also factors in the amount of money gained from existing customers.
Formula for calculating revenue churn rate
To determine your net revenue churn rate for a given month, find your monthly recurring revenue (MRR) — or the incoming revenue you got from existing customers — at the beginning of the month and subtract that from your MRR end of the month. Divide that amount by the total MRR at the beginning of the month: [(revenue from customer at the beginning of the time period – revenue from customers at the end of the time period) / revenue from customers at the beginning of the time period] x 100 = revenue churn rate (%)
If you want to find your gross revenue churn rate, subtract any upsells, upgrades, or other additional revenue from existing customers when calculating your MRR at the end of the month.
Remember: Do not include any revenue from new customers during this time period. Churn rate calculates the amount of revenue you lost from repeat business, not the total change in revenue.
Why ecommerce businesses should make churn a priority KPI
We already explained that customer retention is make-or-break for online stores because, while repeat customers account for only 21% of customers, they generate 44% of revenue and 46% of orders. By conducting churn analysis and lowering your churn rate, you’ll increase the long-term revenue, or customer lifetime value (LTV), of each new customer that makes a purchase.
Repeat purchases are just the tip of the iceberg. If you can deliver a customer experience that produces loyal customers, you can also expect more reviews and referrals, larger cart values at checkout, more opportunities for upgrades and upsells, and higher-quality feedback to continue making your product and customer experience even better.
Understanding a healthy churn rate for ecommerce brands
A good churn rate is difficult to benchmark for ecommerce because, as we mentioned, most ecommerce stores are not subscription-based. Beyond that, some ecommerce stores are a better fit for repeat business than others. For example, a company that sells coffee beans will naturally experience more repeat business than a company that sells coffee machines, because most households only need one machine but will regularly need new beans.
However, Omniconvert analyzed data from over 1,000 online stores to give a sense of the average churn rate for ecommerce, or the rate at which customers return to an online store after their initial purchase. The following numbers show the % of customers that were not retained, meaning they purchased at least one item but did not come back to purchase additional items, over a year-long span:
- Beauty and fitness: 62% churn rate
- People and society: 63% churn rate
- Food and drinks: 64% churn rate
- Health: 65% churn rate
- Books at literature: 69% churn rate
- Pets and animals: 70% churn rate
- Sports: 70% churn rate
- Apparel: 71% churn rate
- Home and garden: 75% churn rate
- Toys and hobbies: 77% churn rate
- Shoes: 78% churn rate
- Apparel clothing accessories: 79% churn rate
- Consumer electronics: 82% churn rate
- Gifts and special events: 82% churn rate
These metrics may help you understand how your churn rate compares to your customers. However, if your churn rate doesn’t stack up, don’t be discouraged: the biggest challenge is to continually improve your own metrics, not necessarily outpace your competitors — at least in the short term. By optimizing your store and focusing on lowering your churn rate month after month, you’ll develop a highly competitive score in due time.
7 ways ecommerce companies are reducing their churn rates
It may be impossible to get your company’s churn rate to zero, but it is important to make sure it stays as low as possible. As mentioned earlier, it can be tricky for ecommerce businesses to address churn, unless you’re a subscription business. Luckily, there are still some strategies you can employ to help reduce your churn rate that lean heavily on understanding your customer base and emphasizing a great customer experience.
1) Segment customers to target the right people at the right time
A large part of addressing churn is having a deep understanding of your customers and their unique desires. For many businesses, there are major differences within the customer base and segment that customer base helps you personalize your marketing and customer experience. This way, everyone who visits your site, receives a message, or makes a purchase gets a tailored experience.
You can segment customers along many axes including (but nowhere near limited to):
- Items they purchase
- When they make purchases
- The volume of their purchases
- Demographic factors
These customer segments help you send targeted advertisements, reduce irrelevant or repetitive messages, and provide tailored support.
If you use Gorgias for ecommerce customer service, the integration with Klayvio can help you create better customer segments based on support interactions. For example, you could exclude anyone with an open support ticket from marketing emails, or send a targeted win-back campaign to customers who rate their support experience poorly. Both of these examples could be great ways to rescue at-risk relationships all along the customer journey, reducing lost customers for your brand.
2) Collect feedback from customers on a regular basis
Another way to address a high churn rate is to regularly collect feedback from your customers. Customer feedback can teach you a lot about what your customers expect.
If you use Gorgias, you can automatically send CSAT surveys after every support interaction to get real-time feedback from customers. On top of CSAT, we recommend collecting net promoter score (NPS) and conducting periodic long-form interviews with your most engaged customers to understand what’s working and what could be improved.
Once you collect customer feedback, there are a number of things you can do next. Here are some to think about:
Ask fans of the company to write reviews, or create a referral program
Once you begin to gather positive feedback from customers, you may think about creating a campaign to field reviews or even create a referral program. It’s not exactly ethical to outwardly ask customers to write good reviews, but if they rate your company highly, there’s nothing wrong with thanking them and asking if they’d be interested in sharing their experience with others.
If you use Gorgias, integrations with tools like Yotpo and LoyaltyLion can build a simple review and referral program into your customer experience platform. Both integrations help you deliver a special customer experience to your most valuable customers and generate more reviews and loyalty as a result.
Thank the customer for their feedback (positive or negative)
Once you’ve heard from a large group of customers, be sure to respond to each customer and thank them for their feedback, whether it’s positive or negative.
Perhaps even consider offering them a promo code as a “thank you” that can be used on their next purchase. For customers that specifically had negative feedback, be sure to follow up to address the issue.
Here, we set up a Macro, or a templated response, for customers who have left negative reviews with the help of the Yotpo integration:
Share feedback with other teams to implement larger improvements to your product and CX
Once you collect feedback, you need to make sure it gets to the team that can actually implement it. We see so many customer support teams sitting on a gold mine of customer feedback without a system to disseminate it across the company. Whenever possible, reiterate to your company’s leadership that your team speaks to customers more than just about anyone, and other teams should be hungry for those insights.
With Gorgias, you can auto-tag tickets with categories of feedback so that you can quickly and easily sort, quantify, and digest feedback about the product, shipping, website, or anything else. Autotagging involves a combination of Intent Detection, which analyzes the words in each ticket to automatically detect the category of issue, and automated Rules, which give each ticket a tag based on the intent (like “feedback-product”).
And, since Gorgias’ pricing model doesn’t charge for extra seats, you can even invite members from each of those teams into the helpdesk and create a special view that only shows tickets tagged with the relevant type of feedback so they can see exactly what customers have said about their specific function within your business.
3) Use omnichannel and proactive customer service strategies
Great customer support reduces churn by helping customers avoid and solve issues that would have otherwise driven them away from your brand. We write a lot about what makes great customer support, but here we’ll focus on one central idea: reducing customer effort.
Reducing customer effort means that customers don’t have to search hard for ways to contact support or wait a long time for an answer. Two specific strategies stand out to give customers convenient, fast support:
First is omnichannel service, which is all about letting customers get in touch with you in whichever channel they prefer, in the least bumpy and disjointed way possible. Whether customers want to call, text, or message you on Instagram — or a combination of all three — they shouldn’t have to re-explain the problem. This kind of meet-them-where-they-are support is the new baseline for customer service, and anything less may drive customers away.
Second is proactive customer support, which can look like welcoming new customers with a DM on social media, asking if website visitors have any questions via your live chat, or setting up self-service resources like an FAQ page on your website. All three of these options give customers more opportunities to raise questions, get recommendations, and have a satisfying shopping experience without too much effort.
4) Introduce loyalty-building campaigns and strategies
A final way you can help reduce churn is by introducing loyalty-building campaigns and strategies. This further builds upon understanding the various segments of your customer base and what each group wants. Some specific campaigns you can tap into include rewards programs, giveaways, and user-generated content (UGC).
Use rewards programs to incentivize repeat shopping
If you don’t have a customer loyalty program already (otherwise known as a rewards program), you may want to consider it. This type of program rewards customers who repeatedly interact with your brand and is a customer retention strategy. In basic terms, the more a customer interacts with your business, the more rewards they earn. This is most commonly seen through offering points for every dollar a customer spends, then being able to cash those points in for various rewards.
Nearly 68% of customers said they’d join a loyalty program for brands they like, and 56% of that group said they were willing to spend more with a brand — even if there are cheaper options available — according to Yotpo’s State of Brand Loyalty 2021 Survey.
The more loyalty points a customer has with your brand, the harder it will be for them to churn.
Run giveaways to build customer loyalty
Just like a rewards program, giveaways can improve brand sentiment and help attract and retain customers.
Here are some helpful tips to consider when creating your brand’s giveaway campaign:
- Have a clear goal. Do you want more social proof or do you want to build awareness around a new product?
- Clearly state the rules of the giveaway. Being unclear in your explanation of a giveaway can result in negative experiences for potential customers, so be clear and concise in your explanation of the rules.
- Be strategic with the entrance to the giveaway. If you are looking to boost your business’s Instagram following, have the entrance criteria for the giveaway be to follow your brand on Instagram. If you want to generate a lot of new email subscribers to expand the sales funnel, require a subscription to your brand’s emails.
- Choose a prize that your audience would love. Just about anyone would like a new iPhone or a $100 Visa gift card, but those types of prizes won’t necessarily bring in quality potential customers. Choose a gift that is either a product from your company, or within the same industry.
Use user-generated content (UGC) to engage current and new customers
User-generated content is a win-win: It celebrates your current customers while serving as social proof for new ones. Ask paying customers to send a photo or video of them using the product to share on your website or social media. For additional incentive, you can compensate chosen submissions with a gift card or discount code — all of which bring those customers even closer to your brand.
Meanwhile, that content will serve as marketing for new website visitors. Over half (51%) of consumers in a survey by Olapic and Cite Research said they “trust user images because they are more authentic and trustworthy than brand-owned assets.” So, if you haven’t implemented UGC strategies, it may be time to give them a try in order to engage new and current customers while contributing to a lower customer churn rate.
5) Implement systems to stop involuntary churn
Voluntary churn, when a customer decides to cancel their subscription or stop buying products, isn’t the only type of churn. Involuntary churn, also called passive churn, occurs when customer orders don’t go through and nobody notices or cares to find the reason. Usually, involuntary churn is because a customer got a new credit card and didn’t update your information.
If you sell a subscription-based product, avoid these passive cancellations by creating a process to follow-up with customers after their card fails on a renewal date:
- Run the card multiple times to ensure the error wasn’t a fluke
- Send an automated email sequence from various members of your support team to remind the customer to update their card to continue the subscription
- Escalate the outreach to SMS if the customer still doesn’t respond or update the card
- Export the contact and build a list of involuntarily churned customers to conduct a separate win-back email sequence
According to data from our CX Growth Playbook, reducing involuntary churn is a low-lift initiative that could boost your revenue by .05%. To learn about 17 other improvements to your customer experience that can boost revenue, check out the full playbook.
6) Improve your post-purchase experience
Your post-purchase experience is everything that the customer sees (or doesn’t see) after they complete a purchase, like a page that appears confirming the purchase and the follow-up confirmation. Think of your post-purchase experience as your onboarding from new customers to existing customers.
A poor post-purchase experience leaves first-time customers wary about your brand and confused about what to expect next: When will the product arrive? How long can I get a refund? Did they get my address right? All of these could be factors in a customer’s decision not to return to your brand.
- Deliver important how-to and use case content
- Provide plenty of opportunities for feedback (and ask directly)
- Invite customers to join your brand communities
7)Encourage exchanges instead of returns
Exchanges are preferable over returns for a couple of reasons. First, an exchange is much less expensive for your brand since the customer still pays for a product, even if you have to cover the extra shipping. Second, exchanges are better for customer relationships because you still give customers an opportunity to fall in love with your product and, hopefully, stick around instead of churning.
You can steer customers toward an exchange by offering additional trade-in credit for exchanges. Loop Returns makes this simple within their returns and exchanges portal:
This strategy is effective: Shopify stores that use Loop issue 15% fewer refunds than brands that don’t.
You can also add live chat support on your returns portal page, which gives your customer support team an opportunity to resolve whatever issues drove them to the page or suggest a replacement product.
Even if a customer requests a return, make the experience as easy and fast as possible. Even if you lose one sale, a great experience may make it more likely for the customer to come back for the next. Whereas a bad experience guarantees they’re gone for good.
To make returns as fast as possible, use a helpdesk that integrates with your ecommerce platform so you can issue a refund directly in the helpdesk.
Lower your churn rate – and other key KPIs – with Gorgias
Since you landed on this article, you might be in the process of creating a system to measure and improve your brand’s ability to satisfy customers and generate repeat business. If that’s true, check out our guides to evaluating your customer service program, gauging your customer support team’s return on investment (ROI), or our list of ecommerce KPIs your brand should track.
And as your brand continues to grow, keep a close eye on the customer experience you offer your customers. While some brands treat customer experience more like a vibe than an essential growth strategy, we know that CX and revenue are closely linked.
Want to learn more about how to turn your customer support team into a profit center? Book a demo and see Gorgias, the helpdesk designed for ecommerce growth, in action.