What is churn in ecommerce and does it matter?

Churn in ecommerce is the rate of customer attrition. In other words, it’s the rate at which existing customers stop using a company’s service. Ecommerce churn can and does occur when a company is growing. Overall growth may make customer churn less painful, but it’s still important.

Why is customer churn in ecommerce a KPI?

There is a cost to acquiring customers. Each customer has to generate enough value to justify that acquisition cost. The more value a customer generates, the greater your return on the initial investment needed to acquire them. In general, the longer a customer stays active with you, the more value they generate.

Businesses need to know their customer churn rate so they can measure the success of their customer-acquisition strategy. They do this by benchmarking their own customer churn rate against the average in their industry sector. They also monitor how it varies over time or in response to various campaigns.

As a rule of thumb, a healthy customer churn rate is somewhere between 5% and 10%. If it’s above this, you are failing to make the most of your customer-acquisition budget. If it’s below this, you need to ensure that you’re still working to win new customers. Otherwise, you could be very vulnerable if your churn rate does go up for any reason.

How to calculate the churn rate in ecommerce

The standard formula for calculating the churn rate in ecommerce is:

(Number of customers at period start - Number of customers at period end)

/ Number of customers at period start

Although this formula looks simple, it’s crucial to get the details right. Firstly, be clear on your definition of customer. Are you going to count anyone who’s signed up to your service even if they only use it for free? 

If you’re going to set a qualifier, how hard will it be to pass? For example, will you include anyone who makes a purchase or just people who make a certain level of purchase? Will you include people who only make ad-hoc purchases or focus on people who have subscriptions? Will you look at all users but segment them? If so, how?

In the beginning, it’s fine to experiment with different options to see what works for you. Once you’ve settled on one, stick with it for as long as possible, and only change it if there is a clear need to do so. Staying with the same definition allows you to make valid like-for-like comparisons over time. 

What are the reasons for customer churn in ecommerce?

Customer churn is generally defined as involuntary or voluntary. Involuntary churn is when the customer drops the service by accident. Voluntary churn is when they make a conscious decision to leave it. However, there is a grey area between these categories. Involuntary churn can lead to customers then making a conscious decision to leave.

One common example of this is the issue of gym memberships If the customer experiences a payment issue, their access to the gym may be automatically revoked. This is involuntary churn. The gym may attempt to reverse this by reaching out to them. At that point, the customer may actively decide to cancel their membership. This becomes voluntary churn, but it could have been avoided.

How to minimise customer churn in ecommerce

Involuntary churn is caused by technical issues. The single biggest cause of involuntary churn is payment failures This means that the easiest way to minimise involuntary churn is to put customers onto Direct Debit.

Voluntary churn has two main causes. The first is that a service does not meet a customer’s needs or wants. The second is that a customer perceives that they could get better value elsewhere.

The way to address the first cause is to make sure that you are very clear on your customers’ needs and wants. Then make sure that your service at least meets them. Preferably, it should exceed them. Also make sure that your strengths are effectively communicated. 

The way to address the second cause is to be very clear on your value proposition. Educate your customers on why your service is worth their money.

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