What is Customer Churn in eCommerce?
Customer churn in e-commerce refers to the percentage or number of customers your business has lost in a certain period of time. This is also known as customer loss, customer attrition, or customer defection.
Customer churn is an important metric to measure the performance of your ecommerce business. Due to the different approaches available to calculate and tackle this, navigating customer churn may seem like a complicated process for ecommerce business owners. This article will simplify this concept for you and help minimize customer churn in your ecommerce business.
Why is customer churn an important metric for eCommerce businesses?
Customer churn is an essential metric for ecommerce businesses as it measures customer satisfaction, loyalty, and retention. We have listed some of the most impactful reasons why customer churn is an important metric.
1) High cost of customer acquisition
The cost of customer acquisition through marketing is 5x more than retaining an existing customer. Because of this, high customer churn rates are always visible in other key performance indicators like ROAS (Return on Ad Spend).
This makes it immensely important to minimize the churn rate of your business. A lower churn rate leads to higher profits and sustainability in the long run. Rather than burning money in marketing, spending to retain existing customers can ensure the profitability of your business.
2) Reputation of your ecommerce brand
No matter how big your marketing budget is, word-of-mouth publicity is vital for organic growth. A low churn rate ensures that your customers are satisfied and likely to vouch for your brand. Consequently, a high churn rate points to a higher volume of unsatisfied customers discouraging others from trying out your products.
3) Average purchase value
Average purchase value is another key performance indicator that says a lot about the health of your business. While new customers are unlikely to make high-value purchases, customers who already trust your brand will. A healthy and growing average purchase value is directly correlated with a low churn rate.
How can you calculate customer churn of your eCommerce business?
Customer churn rate = (number of customers lost) / (number of customers you had at the beginning)
Do note that the customer churn rate is calculated over a certain period of time. For ecommerce businesses, this is generally one quarter. You can also use a custom time period for this calculation. Keep reading to gain a better understanding of why using a custom time period might become necessary!
We at Clickpost always recommend taking into account only the number of customers you lost, while ignoring the number of new customers gained. You can also use your custom metrics if needed.
Another dilemma you are likely to face while calculating customer churn rate is how to determine if a customer has been lost. For ecommerce businesses, customers are generally considered lost if they do not make a purchase for a certain amount of time. The exact parameters will depend on the nature of your business.
Top 6 Ways to understand trends in your churn rate
1) Look at customer acquisition cost
The customer acquisition cost provides a quick glimpse into your customer churn rate. A high and increasing customer acquisition cost points to an increasing churn rate. On the other hand, a decreasing customer acquisition cost generally points to a decreasing churn rate.
Do keep in mind that this comes with several caveats. The customer acquisition cost is influenced by several factors. You should always thoroughly understand the complete picture before making inferences. That being said, a decreasing customer acquisition cost is generally a sign of a mature and sustainable business.
2) Pay attention to reviews
Reviews are the easiest way to look at customer satisfaction without dealing with numbers. You should keep an eye on the feedback provided by your customers, as well as reviews left on third-party sites. The fact that unsatisfied customers are more likely to leave reviews only makes your work easier!
3) Analyze purchase trends of long-term customers
Analyzing the purchase trends of your long term customers will give you a clear picture of how successful your customer retention policies are. You can do this by looking at customers who have been making repeat purchases for a significant period of time. If you are losing your long term customers, there is something wrong with your order fulfillment processes and you need a relook at them.
4) Analyze cart abandonment trends
Ecommerce businesses can use cart abandonment as another indicator used to quantify the performance of the business. An increase in cart abandonment points to issues in the user experience and checkout processes. Like the other indicators we have discussed, cart abandonment numbers are also strongly correlated with your customer churn rate. Higher cart abandonment numbers will often result in an increased customer churn rate or percentage.
5) Look at failed deliveries and product returns
Failed deliveries and product returns allow you to look at the reasons for customers leaving your brand. These are often related to subpar shipping services. Failed deliveries can seriously impact your brand image and make customers hesitant to purchase again.
6) Keep seasonal trends in mind
While calculating the churn rate of your ecommerce business, you need to keep seasonal trends in mind. This is highly dependent on the nature of your business. But for most ecommerce businesses, there are seasonal upturns and downturns. If your business has been operating for a long time, looking at data from the past few years will help you understand these seasonal trends. If you are new to the ecommerce space, you should look for data from established brands in your vertical to understand these trends.
Top 5 Factors that can increase your churn rate
1) Low brand visibility
Low brand visibility can take you off the mind of your existing customers. This increases the chances of your customers trying out competing brands.
To counter this, you should run ad campaigns targeted towards customer retention. These marketing campaigns are very different from marketing processes used to acquire new customers. Additionally, they generally have relatively lower costs and better conversion rates.
You can consider offering customer product bundles based on past purchases and customized offers and reminders on important days like birthdays. Another great way to tackle this is by introducing a loyalty program. Depending on customer demographics, this can be paid or can be based on some other parameter.
2) Subpar shopping experience
Customers are less likely to revisit a site with a subpar user experience. Apart from making the entire experience frustrating, this also prevents your customers from finding the product they are looking for.
If you have your own app or website, you should always take help from professionals to create a seamless experience. One often ignored part of user experience is latency. Make sure that your website or app is responsive enough.
If you are using a marketplace like Shopify, the user experience part is already being taken care of. Irrespective of the platform you are using, you should also make sure that your products are categorized properly.
3) Product quality issues
Product quality issues are generally a leading contributing factor towards a high customer churn rate. If your products are having quality issues, it is extremely unlike that the customer will purchase from you again.
Product return is one of the ways of looking at this. You should also look at long term reviews from your customers to find out if they are having issues beyond the return period. You can seek feedback from customers a few months after the purchase to understand product quality issues better.
4) Shipping delays
Shipping delays are a sure shot way of losing customers. This makes order cancellation more likely while also eroding trust in your ecommerce business. Customers who have experienced subpar shipping service are very unlikely to order from you again.
5) Competitors providing better value
Sometimes you cannot find any apparent problem in your business practices, and still lose customers. This can happen if your competitors are offering better value. This is more widespread in crowded segments, and relatively rare in niche product categories. As a general rule of thumb, the importance of offering value for money services increases with lower product costs and low margin businesses.
Better value can come in several forms. While the simplest type is lower upfront pricing, your competitors might also be offering better service at the same cost. In some product categories, customers might even be willing to pay a slightly higher cost for better service. In other product categories, this might take the form of better quality products at the same price.
To counter this, you need to have a good understanding of the strategies employed by your competitors and revamp your business processes based on that. If these do not seem to work, you might need to start cutting back on your margin to aid customer retention.
5 Most effective ways to reduce your customer churn rate
1. Run effective promotions
Running effective promotions can keep your customers engaged. This makes them more likely to shop from you rather than looking for alternatives. Remember that for an existing customer, your ecommerce brand will be the default choice if you are offering proper value and service.
2. Seek feedback from customers
Seeking feedback from customers is the easiest way to identify shortfalls in your business practices. Do remember that only 10% of unsatisfied customers will generally offer feedback. The rest will simply not purchase from you again.This makes it immensely important to act on the customer feedback you receive.
3. Provide a streamlined and responsive UI
A streamlined and responsive user interface aids customers in making purchases. Having chokepoints in the purchase process will enable customers to rethink the purchase. This also makes them more likely to take a look at your competitors. If you are operating in a segment where impulse purchases are the norm, a good user experience is even more important.
4. Revamp your QC
Poor quality control will erode trust in your ecommerce brand and compel customers to look for alternatives. While a liberal return policy can somewhat counter this, it introduces new complications. In this age of relentless competition, you must absolutely have proper QC practices to ensure that customers do not receive defective products.
5. Offer top notch shipping experience
The shipping and delivery experience is the only real-world interaction customers will have with your brand. This in turn makes the image of your brand highly dependent on the quality of your shipping services.
To ensure proper shipping services and timely notifications, you should consider opting for a dedicated logistics service provider. This will also simplify the process of getting feedback and actionable insights.
Customer churn in ecommerce is an important metric. It provides insights into the sustainability of your business and product quality. As customer churn is correlated with a number of performance indicators, it often seems like a convoluted metric.
Understanding the factors that influence customer churn rate can make it easy for you to understand how your business is performing. This also gives you an overview of why customer churn rate is important and how you can minimize your churn rate.
1) Which key performance indicators (KPIs) are correlated with customer churn rate?
KPIs like average order value, customer retention rate, cart abandonment rate, average profit per customer, and return on ad spend are correlated with customer churn rate. Changes in these KPIs will definitely show up in your customer churn rate.
2) What are some other terms used to refer to customer churn?
Some popular terms used to refer to customer churn are customer attrition, customer defection, customer loss, and rate of attrition. While some of these are essentially the same thing, others have minor differences in the method of calculation.
To gain a better understanding of the entire picture, you should take a look at the exact method of calculation. This generally requires strong domain knowledge of the ecommerce space, as you need to understand every metric that goes into the calculation.