Churn Rate: What It Is And How To Lower It
Acquiring a new customer can be up to 25 times more expensive than retaining or upselling existing customers. In an economy of scale, that’s huge, so smart companies focus on delivering value to their existing customers.
But sometimes, existing customers choose one of your competitors. That’s churn, and it’s an indicator of how well your company can hold onto existing customers.
Working to reduce churn is about increasing the amount of time that customers stick with you instead of looking elsewhere. If you can successfully re-engage customers or upsell them to more profitable products than your initial sale, then you’re going to start reducing churn.
So let’s talk about churn.
What Is Churn Rate?
To find out your churn rate, you take the total amount of customers in a given period of time, then you calculate the percentage of those customers that either didn’t buy again, or went to your competition for maintenance, consumables, or different varieties of that product.
Sure, when you manage an ecommerce store the situation can get a bit more complex. For example, single-time buyers, for whom it makes no sense to repeat buy in that period of time, need to be taken out of the equation.
But that’s more or less what the churn rate is. For ecommerce stores, the average churn rate is between 3%-12%, depending on your industry. You can Google specific industries to see how you deal in your individual market.
If your churn rate is higher than that, you need to spend some more work in retaining customers, or even revise your products if you decide that that’s the problem.
Even if you fall into your industry average, that doesn’t mean there’s nothing you can do to lower the churn rate. Before you do that, though, you might want some advanced ways of calculating it.
How To Calculate The Churn Rate For Your Business
The easiest way, of course, is to divide all the churned customers by the total amount of customers in a given period of time. Sometimes, that might be enough to let you know that something’s wrong.
However, calculating churn is a bit more complicated, because:
- Getting the total amount of customers you have might not be easy if you have multiple distribution channels
- Factoring in the value of the product can lead to completely different reasons for why customers churned, or bought in the first place
- Seasonality affects churn rate, and can create misleading statistics
- Customer segments churn differently
So the first thing you want to do is to niche down your research. Try to calculate churn for individual products, or at least specific price points, and cover a period of time long enough to take seasonality into account.
Besides that, you can calculate using more than one formula. For example, you can divide the number of churned customers by the sum of customers at the beginning, and at the midpoint of the month, divided by 2. That way, you can get a more accurate time span for your calculations.
If you want to find out more about different ways to calculate churn, you can read Profitwell’s article on the topic. It’s really insightful.
For now, let’s assume you calculated churn, and you want to do something about it.
How To Avoid Churn
Before we get into it, remember that calculating and then doing something about churn is an ongoing process. In many cases, it will require a shift in focus for your departments, or even the entire company.
But churn is not unavoidable. So let’s see what you have to do.
Listen To Your Customers
If you ask customers why they churned, you’ll most likely get a straight answer. The first step here is to check bad reviews and understand what contentions people have about your product. Sure, you might not get a lot out of rants, or 1-star reviews from people unhappy about a random thing.
But there are balanced reviews out there, and you should understand what objections people have about your products, or your service. Anything from shipping time to product quality can be an issue.
But browsing through reviews won’t show you the whole picture. After you get a basic understanding of why customers churn, start surveying people that switched to your competition. You should think of ways to compensate for the time spent completing a survey, or you can just hire a surveying agency if you have the resources to do that.
And for a pro tip – try to identify and survey people that are close to churning, but haven’t done so yet. It’s the easiest segment to get answers from, and you can actually strike up a conversation that changes their mind before they churn.
Work On Your 4 Ps
The 4 Ps of marketing, product, positioning, price and promotion, can be a good starting place to improve your churn rate. Yes, this principle is more helpful when deciding how to market your product.
But the 4 Ps can impact churn rate a lot. Maybe your price is turning people away, maybe there are better products out there, or maybe other companies do a better job promoting their products, so you lose customers to your competition.
To avoid churn rate, draft details about each P, and think of ways to improve them. It will help you stop customers from churning, but even if it didn’t, it’s still a good exercise. At the very least, you’ll get a better understanding of how your company is positioned in your market, and maybe even convert more.
Focus On Customer Service
Customer retention has a lot to do with how people feel after they’ve purchased a product. If you manage to keep them happy even after you took their money, you’ll make sure your churn rate is as low as possible.
Here are a few things you can try:
- Improve your shipping times as much as you can. Shipping products as fast as possible is a great competitive advantage for any ecommerce store.
- Make sure your customers use your products to their full extent. You can think of creating a user’s manual, or even just following up with an email after significant purchases.
- Create a loyalty program. Reward repeat customers and people that spent a lot on your store with special offers and discounts.
We hope this article shed some light on what churn rate is, and how you can avoid it as much as possible. If you liked what you read today, you can check our other articles helping ecommerce stores boost their bottom line, like our piece on how to reduce your cart abandonment rate.