What Is eCommerce Churn and How to Calculate it?

~ 15 min read | July 29

Customer churn is a frequent issue eCommerce businesses face. When you’re trying to build a customer base that delivers recurring revenue, you want to ensure that your eCommerce churn rate is as low as possible.

Churn occurs when customers take their business elsewhere. This is true for both online stores and eCommerce stores that sell subscription boxes. And while no one ever wants to lose a customer, there’s a lot we can learn by examining customer churn rates. 

By identifying how many people are abandoning your proverbial ship and determining why they’re doing so, you can find huge issues within your organization that need corrective action. And if you don’t examine your churn rate regularly, you might not notice a problem until it’s too late. 

This article will highlight the importance of understanding customer churn for eCommerce businesses, going in-depth on the definition of churn, how you can calculate your churn rate, signs that your churn rate might be increasing, and how to mitigate churn to an acceptable level.

What Is Churn in eCommerce? 

Customer churn is the term used to describe the number of customers who stop buying from your online store. The churn rate is the percentage of customers who stop doing business with you over a predetermined period. 

There are two types of customer churn that can directly affect the bottom line of an eCommerce business: voluntary churn and involuntary churn

Voluntary churn occurs when a customer actively decides to stop buying from you. This could be due to dissatisfaction with the service. Involuntary churn occurs when something like a payment failure causes a customer’s purchase to fall through. Voluntary and involuntary churn are measured together to determine your churn rate. 

Suppose you run a subscription eCommerce store and want to examine your churn rate over a six-month period. In that case, you’ll look at how many customers unsubscribed from your services during that time and apply a formula to figure out the percentage. 

To determine your churn rate, subtract the number of customers you had at the beginning of the period by the number you had at the end. Then, divide that by the number of customers you started with, and multiply the result by 100. A detailed formula that explains this further can be found below.

Churn is also called customer attrition. Regardless of which term you use to describe it, a high churn rate indicates a failure to retain customers. Something to remember about churn for any business is that it’s inevitable; no company will ever have a churn rate of 0%. Sooner or later, some of the people you do business with will stop shopping at your store or unsubscribe from your eCommerce subscription service.

The important thing is that your churn rate remains as low as possible and doesn’t exceed your growth rate. Churn is the enemy of customer retention, which is vital for profitability. 

Repeat customers are cheaper to market to, and they’re customers who have shown loyalty to your brand. For subscription-based eCommerce businesses, retention is even more vital. The entire business model is built on recurring revenue, which is why it’s so important to keep an eye on subscription churn. These subscription-based eCommerce businesses need to track vital customer retention metrics, like: 

  1. Customer acquisition cost
  2. eCommerce conversion rate
  3. CAC-LTV ratio
  4. Renewal rates
  5. Annual recurring revenue
  6. Monthly recurring revenue
  7. Subscription churn

The Importance of Knowing Churn and How It Affects Your eCommerce Business 

It’s simply not enough to understand what churn is and the basic science behind it. You have to know your churn rate to derive actionable business intelligence through that data. 

If your e-commerce churn rate is low, it means that your marketing activities are positively impacting your target audience. If your churn rate is high, something is happening that’s pushing people away from your product. You need to determine where that deficiency is so that you can fix it.

Here are some ways that understanding your eCommerce churn can help your business:

1. Lower Acquisition Costs

It’s far cheaper to retain customers than to acquire new ones. This is especially true in subscription-based eCommerce businesses, where customers contribute recurring revenue month after month. It costs up to six to seven times more to gain a new customer than to retain a current one.

A graph showcasing customer retention vs acquisition costs
customer retention vs acquisition costs

Knowing your churn rate could help you determine what you need to do to hold on to more customers. This, in turn, means that you won’t have to invest as much time and money into new customer acquisition. 

However, this doesn’t mean that you should stop trying to bring in new customers. There’s always a need for fresh faces to contribute to your profits. However, if your churn rate remains consistently low, there won’t be a mad dash that requires a huge percentage of your marketing budget. 

2. Determine Operational Shortfalls

Understanding your churn rate can give you insight into the issues plaguing your organization. 

A high churn rate is indicative of problems. Something is driving these people away, and by understanding that a problem exists, you can figure out what it is and stop it, thus keeping people from unsubscribing. 

Some common issues uncovered by a high churn rate include: 

  • Bad customer service
  • A lack of affordability
  • Poor marketing
  • A big marketing push from competitors
  • A poorly designed website

We will go into each of these in greater detail a little later. 

Doing periodic churn analysis will help you identify these issues and nip them before they consume your business altogether.

3. Increased Revenue

All of this boils down to one thing: Understanding your eCommerce store’s churn rate will increase your revenue. 

Reducing your customer acquisition budget while identifying issues and correcting them will increase your customer retention

Improving your retention by just 5% can increase your profits anywhere from 25% to 95%. On top of that, it can reduce the probability of re-selling to an existing customer to somewhere between 60% and 70%. To compare, the odds of selling to a new customer are only 5% to 20%. 

This means that not only is it more expensive to bring in new customers, but your odds of success are much lower. 

How is eCommerce Churn Rate Calculated? 

Now that you understand why your eCommerce churn rate is so important, it’s time to discuss how you can measure it. 

A formula for calculating customer churn
customer churn formula

As we mentioned before, there’s a simple formula that allows you to determine your eCommerce churn rate for a particular period of time. Let’s say you’re trying to determine how many customers churned in the first quarter of 2022. 

You’ll start by identifying how many customers you had at the beginning of that period. In this example, that would be the number of customers you had at the beginning of the year. 

Then, you’ll determine how many customers you had at the end of that same period. In this example, you’d look at your numbers for the end of the quarter. Even if your numbers have increased, you should still be able to tell how many customers left during that time. 

In the next step, you’ll subtract the number of customers you lost from the number you started with. Then, you’ll divide the result by the original number of customers.  

Once that’s done, you’ll multiply the result by 100, and that number is your eCommerce churn percentage. 

Let’s go through a sample scenario: 

You started the quarter with 6,500 customers. You ended it with 4,300. 

We now subtract those two numbers. 

6,500 − 4,300 = 2,200

This gives us a difference of 2,200. We then divide that by the original 6,500. 

2,200 / 6,500 = 0.338

This gives us 0.338. We then multiply that by 100 to get our result. 

0.338 x 100 = 33.8

This gives you a customer churn rate of 33.8% for the first quarter of 2022. 

Once you’ve gathered enough churn data from year to year, you will see trends. This will enable you to create a churn prediction system that allows you to identify deviations over time and establish a benchmark to measure against. 

If you predict a churn rate of 10% based on past experience and calculate an actual churn rate of 25%, there’s something wrong that must be addressed. 

What is a Good eCommerce Churn Rate?

If you want to know the average eCommerce churn rate, there’s no concrete, universally accepted answer.

The truth is that churn rate varies from business to business. You have to determine your profitability threshold and the acceptable amount of churn you can allow to reach it. 

It’s widely believed that anything under 5% is a good churn rate for eCommerce companies. However, that’s not always the case. Some enterprise companies might see churn rates of up to 10% and consider them a success.

The Top Reasons for Customer Churn in Your eCommerce Business 

Earlier, we touched on several reasons your eCommerce business might experience customer churn. Let’s go through them now in greater detail. 

1. Poor Customer Service

Poor customer service is a huge contributing factor to customer churn in the eCommerce world. 

An image detailing the importance of customer service
Importance of customer service

An astonishing 81% of consumers say that positive customer service experiences increase their odds of continuing to buy from a company. That’s why your customer service team should be well trained in your products, services, and sensitivity. 

2. Perceived Low Value

Customers need to see value in the products and services that you sell. Many customers are willing to pay more for quality products as long as they feel they’re getting their money’s worth. 

If a customer believes that the value of your product doesn’t match its price tag, they’re going to churn and not look back. That’s why it’s so important to price your products well and have the flexibility to lower them if you start to see significant value-based churn.

3. Competitors With Better Offerings

Sometimes, your churn rate can skyrocket through no fault of your own. There are times when your competitors are knocking on your door, stealing customers away with a deal that can’t be beat. 

That’s why you must keep an eye on your competitors and track what they’re doing to keep your loyal customers by your side. 

US companies lose a total of $136.8 billion every year from avoidable switching.

When your chief competitors come for you, be ready to fend them off with a can’t-miss offer of your own. These efforts might even succeed in wooing some of your competitors’ customers over to you. 

4. An Unclear or Difficult-to-Understand Purchase Process

You need to create a logical path to conversion for your customers. When it’s time for them to make a repeat purchase or renew their subscription online, they shouldn’t have to think twice about how to make that happen. This is part of the customer experience.

To that end, you need to ensure that your purchase process follows a logical flow and is simply laid out. If you make the process needlessly complicated, people will churn, and you’ll lose business. It’s equally important to ensure that your customer onboarding process is optimized and easy; otherwise, you’ll lose people fast.

What is eCommerce Churn Analysis ?

Churn analysis is the process of using your churn data. You should be regularly monitoring and analysing the churn rate of your eCommerce store. If you haven’t done this in a while, there are several indicators that something is going on and your churn level needs a new look. 

These include:

  • Regularly declining purchases
  • Negative reviews being left on your website or in public locations like Google 
  • Net Promoter Score (NPS) score reductions 
  • A reduction in purchase frequency by customers who have been loyal in the past 
  • Late payments

If you notice any of these issues popping up in your company, it’s time to examine your churn rate and quickly determine what’s going wrong. Identifying these problems early will help you correct them quickly and mitigate their adverse effects.  

 How to Reduce Churn in Your eCommerce Business ?

Once you have enough information to create a churn model for your eCommerce business (wherein you can accurately gauge how much churn you should expect), you’ll be able to determine when your level of churn has risen too high. 

When that happens, you need to be able to take immediate action to reduce your churn rate. Here are five actionable tips for reducing churn and keeping your company in the black.

1. Improve Your Customer Service

You can reduce churn by improving your customer service. A study conducted by American Express showed that 33% of customers consider dropping a brand after just one instance of poor customer service. This is a huge contributor to rising churn rates. 

To improve your customer service, you have to create a more optimized customer service experience. This means less time on hold. Try using an automated system to handle simple requests, freeing up your customer support team to take on some of the more complicated or technical issues that sometimes plague eCommerce businesses.

Proactive customer support also goes a long way. For example, Shopify reaches out to its customers via social media when an outage occurs, rather than waiting for those customers to call in and complain. 

A tweet from Shopify support about an outage
Proactive customer support example – Shopify’s support tweet about an outage

Shopify frees up its phone lines by relaying this information proactively, thus lowering wait times and easing customer frustrations that might otherwise have led to an increased churn rate. 

2. Provide Loyalty Perk Programs 

Many companies provide loyalty membership programs as a way of establishing a sense of brand loyalty with their customers while rewarding repeat purchases. 

In such a system, customers earn points for repeat purchases and can then redeem those points at a later time for something like a gift card, a small item, or a percentage off of a purchase. This is a tactic with a proven track record of success. A massive 81% of consumers show loyalty to ecommerce store’s that implement these programs. 

3. Roll Out Special Deals

People love special deals, discounts, and promotions that reward their continued patronage. You can improve customer retention by rolling out special deals when churn tends to pick up. 

You can also roll out special promotions that trigger specifically when customers try to cancel their subscription to your service. 

Companies like GameFly, an eCommerce subscription video game rental service, do this, going so far as to offer a free month to subscribers who try to cancel. You can even go a step further, implementing a probabilistic approach to churn to target special offers to customers with a high churn probability. 

You’ll need a tool like Chargebee Retention (formerly BrightBack) to roll out these offers. It helps you to provide a personalised offer at the time of subscription cancellation based on the reason selected by your customers. This offer can include a discount, a free month, or a downgraded plan. You can also offer a subscription pause if the reason for cancelling is temporary. 

BrightBack subscribers see a 55% increase in save performance over traditional in-house cancel flows.

4. Pay Attention to Customer Reviews

Customer reviews can be an excellent window into what’s causing your company’s churn rate to increase. It’s important that you read online reviews, particularly those found on your Google Business Profile page.

You should respond positively to bad reviews, apologizing for the issues that occurred and offering to help the customer in any way possible. This kind of outreach might help you avoid churn while showing potential customers that you care about the customer experience. 

This is a wonderful step toward repairing a customer relationship and building brand loyalty, inspiring customers to renew their online subscriptions with your eCommerce store.

5. Ask Customers Who Have Left

Customers who have already left could provide you with some valuable insight. Touch base with customers who have canceled, and offer them a survey asking why they left and what you can do to improve in the future. 

You can follow up on these individuals’ responses with a personalized message, telling them how you plan to fix the issues they described and offering a promotional offer for them to return. This will give you a chance to identify issues you may not have otherwise known about and provide an opportunity for you to win back lost customers.

What Does a Healthy Churn Rate Mean for You? 

Your churn rate is one of the most important eCommerce subscription metrics to measure when you’re trying to keep your business profitable. By understanding how many customers are leaving and why, you can fix lingering issues and create a sustainable, durable business that will build recurring revenue month by month. 

When trying to hold on to subscribers for a subscription-based eCommerce business model, you need the right subscription infrastructure to ensure a smooth purchase process and help you scale into the future. 

Contact Chargebee today to see how you can bring this effective power to your subscription-based eCommerce business.

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Haris Kumar

Organic Growth Marketer at Chargebee.