How to Calculate & Reduce Churn Rate in E-commerce in 2024?

According to a study, substantial employee turnover costs businesses over $1.6 trillion in lost revenue. Almost all companies believe that finding new clients takes money and effort. It is a fact that acquiring new customers and winning their loyalty is sixteen times more expensive than retaining current, devoted ones. As a result, companies ought to concentrate on keeping clients and lowering attrition rates.

But what is the rate of client attrition? How does it impact the customer retention rate and why is it such an important indicator in the context of e-commerce? How is the e-commerce churn rate determined? This extensive tutorial will answer all of these questions. We'll also look into some of the best tactics used in the e-commerce sector to reduce churn rates.

What Is Churn Rate in E-commerce?

Let's first understand the meaning of churn in the Ecommerce world. Churn means when a customer stops buying the company's service or product. Thus, churn in the Ecommerce world refers to when customers leave your service.

The percentage of customers that discontinue using a product or service within a specified time frame is referred to as the "churn rate" in e-commerce. It is an essential metric for business. The business loses more consumers over time and has a worse customer retention rate when the churn rate is higher. 

Another name for it is the attrition rate. Churn rate is mostly used to industries and businesses, such as subscription-based businesses, that significantly rely on recurring revenue. 

In e-commerce, a low turnover rate indicates devoted clients. It shows how well a company's goods, services, and customer assistance work. Once more, a high e-commerce turnover rate indicates possible problems with client happiness or market dynamics and requires quick response.

According to Omniconvert, the average churn rate in the E-commerce domain based on industry is listed below.

• Beauty & Fitness: 62%
• Apparel: 71%
• Shoes: 78%
• Clothing Accessories: 79%
• Food & drinks: 64%
• Health: 65%
• Sports: 70%
• Electronics: 82%
• Gifts & Special Events: 82%
• Toys & Hobbies: 77%
• Home & Garden: 75%
• Pets & Animals: 70%
• People & Society: 63%

Importance of Churn Rate in E-commerce 

Over 50% of clients in e-commerce enterprises would rather not return after making a purchase. Both high and low values of churn rate are important for the e-commerce business to take necessary steps for their future plans. Let's check the importance associated with churn rate in E-commerce.

1. Measuring Business Performance

The data on churn rate is a powerful metric that helps to measure the health of the customer base. The data validate customer retention, and this information can act as a base for future strategies for effective remedies. Uncover trends in customer churn, enabling businesses to make well-informed decisions.

2. Revenue Impact

In e-commerce, churn has a direct impact on revenue since lost consumers translate into lost sales opportunities. For the business to be financially stable over the long run and to maintain a consistent revenue stream, it is imperative to comprehend and minimize attrition. Customer data from Gorgias shows that while repeat customers make up 21% of their clientele, they nevertheless make a substantial contribution—they account for 46% of orders and 44% of overall income.  

3. Customer Retention and Acquisition

Businesses can identify patterns and factors contributing to customer attrition by analysing churn rate in E-commerce. The expense associated with gaining new customers is typically greater than that of keeping current ones. In reality, securing a fresh customer in E-commerce can be five times more costly than preserving an already established customer. The data of churn rate is valuable for developing effective customer retention strategies and optimising customer acquisition efforts.

4. Business Forecasting and Planning

The stats of E-commerce churn rate can be used to make serious decisions and future predictions. It is a base for strategic planning, resource allocation, and setting realistic business goals. Churn rate conveys a lot about customer behaviour and service performance, which are foundational to predicting and preventing churn.

5. Customer Satisfaction

High E-commerce churn rates may be indicative of customer dissatisfaction. Additionally, a negative churn rate is a strong indicator of customer satisfaction and product value, suggesting that a business is not only retaining but also maximising customer satisfaction. 

We can’t avoid the importance of customer satisfaction in a business. If the company succeeds in improving customer satisfaction by 1 percent, it can result in a significant rise of 5 percent in customer retention rates. The churn data will help understand customer satisfaction points by providing insights into customer behaviour, identifying pain points, and implementing strategies to improve retention.

6. Product/Service Improvement

Understanding why customers leave provides valuable feedback for enhancing products or services. According to a survey, 71% of E-commerce consumers identified poor customer service as the primary factor that prompted them to terminate their association with a company. By consistently examining data and comparing the changing churn rate against established objectives, product managers can pinpoint areas of improvement. 

7. Risk Management

Churn is a risk factor in E-commerce that needs to be carefully managed. A consistently high churn rate can pose a threat to the stability and growth of an e-commerce business. Proactive measures can be taken to minimise this risk and ensure the business remains resilient.

How to Calculate Churn Rate in E-commerce? 

After understanding the importance of churn rate in e-commerce, the next vital step is to know how to find the churn rate. Calculating the churn rate can be possible by applying a formula. 

There are two pieces of information required to do the calculation: 

• Number of users present at the beginning of the period.
• Number of users present at the end of the period.

Once we have the information, we can put the values in the formula: 

Churn Rate= (Lost Customers ÷ Customers at the Start of the Period ​)×100

The main information in this formula is the account of the lost customer. Primarily, the churn rate is calculated for a definite period. To determine the churn rate for the financial year, the company needs to know the number of customers at the start and end of the year.

Let's understand this with the help of an example. The company received 7,500 customers at the beginning of the year 2024. By the end, it had 3500 customers. Here, the lost customer count will be 7500-4500= 2500. 

After applying the formula of churn rate, the value will be:- 

• Churn Rate= (Lost Customers ÷ Customers at the Start of the Period )×100
• Churn Rate= (2500 ÷ 7500)× 100
• Churn Rate= 33.33 %

So, the customer churn rate is 33.33% for the financial year 2024. Companies find the churn rates of various periods and compare the trends to understand the behaviour and patterns. 

The above mentioned formula is a simple process to calculate churn rate. Now, let's understand how to calculate this based on the type of business.

Regular E-commerce Businesses 

Calculating churn rate for regular e-commerce businesses can be perplexing. Unlike subscription-based models, businesses without active cancellations face a unique challenge. To tackle this, here's a step-by-step guide.  

• Start by grasping the average repeat purchase timeline of the E-commerce stire. Analyze the time it takes for customers to make a repeat purchase, either by extracting data from repeat orders or estimating based on behavioral knowledge. For instance, let's say an apparel brand typically sees reorders every three months, that becomes its average timeline.
• Next, employ the concept of customer cohorts—grouping customers based on their date of first purchase. Define cohorts based on the date of first purchase and track their activity over a specified period. For instance, if the average repeat purchase timeline is three months, measure the churn rate of the February 2024 cohort by evaluating how many customers didn't reorder in the following six months. Alternatively, if 40 out of 100 customers reordered within the subsequent six months; the cohort's churn rate would be 60%.

Subscription-Based E-commerce Businesses 

Subscription-based e-commerce businesses can calculate churn rate using the formula given below:

Churn Rate = (Customers at the start of the period - Customers at the end of the period + New Customers Acquired in the Period) / Customers at the start of the period

Simply put, it's the difference between customers at the start and end of a period, accounting for new acquisitions. This prevents masking churn beneath the influx of new customers, offering a transparent evaluation.

For instance, imagine having 100 customers on March 1, 110 on March 31, and acquiring 20 new customers in the month. Applying the formula yields a 5% churn rate:

(100 - 110 + 20) / 100 = 10/100, or 10% churn rate.

Causes of Customer Churn Rate in E-commerce

Loyal customers not only contribute to increased business for companies but also influence other potential customers to choose the brand, which is great free advertising for any business. However, there are various reasons why E-commerce businesses lose customers when they are unable to establish this loyal customer base. Let's explore the potential causes behind a high customer churn rate in E-commerce.

1. Price

Pricing is one of the most influential factors behind customer churn in almost every industry, including E-commerce. Mostly, for online purchases, pricing is a competitive factor; the customer can switch to a different seller within a few seconds. 

According to research by FirstInsight, almost 63% of customers consider pricing and deals as the key factors for purchasing through e-commerce sites. It is highly important for the business to find a balance between product quality and pricing where customers get convinced. 

2. Product and Service Quality

Almost 44% of customers consider product quality as a factor in making a purchase. If an e-commerce site fails to maintain standardised product quality, then it will eventually lose customers. If the customer faces repeated issues with defects, unreliability, or dissatisfaction, they will lose trust in the brand. 

3. Losing To Competition

Customers may switch allegiance if competitors offer superior products, services, or incentives. A study conducted by PwC involved surveying 15,000 consumers, revealing that one-third of customers are likely to switch from a beloved brand following a single negative experience. Regularly assessing and adapting to market dynamics is essential to stay competitive and prevent customer migration. 

4. Attracting Wrong Customers

Every business aims to reach a specific audience that genuinely requires its products or services. Attracting the wrong customers is capital waste, and it eventually increases the churn rate. While product marketing, the company must ensure they have high-quality data about the target audience. Customers who are not the right fit for your brand may not perceive any value, potentially resulting in a negative impact on your brand's reputation.

5. Poor Customer Support

Customers may become irate with inadequate customer service due to things like unhelpful agents, long wait times, or a dearth of support channels. For customers to be satisfied and stay with a business, a supportive and effective system is essential. According to Forbes, 83% of online shoppers think that providing excellent customer service may turn them from one-time clients into devoted, recurring ones.

6. Negative Reviews and Unresolved Complaints

Negative feedback, whether through reviews or unresolved complaints, can tarnish your E-commercebrand's reputation. 97% of individuals claim that negative customer service experiences have altered their buying decisions, while 87% acknowledge that positive reviews have influenced their choices. Customers may leave if their concerns are not addressed promptly and effectively. Managing and resolving issues transparently is essential to mitigate churn.

7. User Experience

Customers may leave your website if they have a bad overall experience, which may include a clumsy design, challenging navigation, or intricate procedures. Maintaining a smooth and pleasurable user experience is essential to keeping consumers and reducing attrition.

Top 7 Ways to Reduce Churn Rate in E-commerce in 2024

According to industry research, businesses can increase profits by 25-35% with just a 5% increase in their customer retention. This is why it's important for businesses to focus on minimising and controlling churn rates. Below listed are the top 7 ways to reduce churn rate in E-commerce.

1. Identify and Analyse the Reasons for Customer Churn 

Before jumping into how to reduce customer churn in E-commerce, businesses must work on identifying the potential reasons behind customer churn. These reasons may be many; right from dissatisfaction from product to customer service and many other factors. 

One of the best ways to identify these root causes is by improving communication with customers. Customers would prefer communicating with a human agent about their problems rather than just filling out an exit survey. 

Thus, whenever a customer is leaving, businesses must focus on building a talk with the customer to explore why they left. This not only helps the business in knowing why the customer left but also makes the leaving customers feel appreciated and valued. Furthermore, E-commerce businesses may also employ advanced analytics to identify the potential causes and their patterns. 

2. Segmentation for Improved Customer Experience  

Businesses need to concentrate on resolving those issues after determining the primary reasons why customers are discontinuing the service. In this instance, segmentation aids in classifying the clients according to their issues, making it simpler for e-commerce companies to concentrate on a subset of clients experiencing the same problem.

Businesses can develop tailored solutions and communication strategies that align with particular client preferences by comprehending the distinct needs of each group. This makes it possible for a more customized and focused consumer experience.

3. Identify and solve Cancel Triggers 

By pinpointing the triggers that prompt cancellations, E-commerce businesses can strategically intervene, addressing root causes and fortifying retention efforts. This involves meticulous analysis of customer feedback, support interactions, and behavioural patterns. This proactive approach allows organisations to tailor solutions to customer pain points, thus enhancing overall satisfaction and reducing churn rate in E-commerce.

4. Ask for Feedback and Reviews from Customers 

Encouraging clients to voice their opinions offers a forum for helpful critiques and gratifying endorsements. E-commerce companies can quickly resolve problems thanks to this two-way communication, which also shows a dedication to client happiness.

Streamlined surveys, focused follow-ups, and an easily accessible venue for customers to share their thoughts are all necessary for implementing an effective feedback loop. 

The method yields valuable insights that enable organizations to implement data-driven enhancements, thereby guaranteeing a customer-centric approach.

5. Focus on Improving Customer Service 

A seamless and positive customer service experience is instrumental in retaining clients. Ensuring prompt issue resolution, clear communication, and personalised support fosters a sense of loyalty.

Organisations should invest in well-trained and empathetic customer service teams, equipped to address concerns efficiently. Timely responses to queries, effective troubleshooting, and proactive engagement contribute significantly to customer satisfaction. 

Furthermore, cultivating a culture of continuous improvement within the customer service department aids in adapting to evolving customer needs.

6. Focus on Proactive and Omnichannel Communication 

With a proactive and omnichannel communication strategy, E-commerce businesses position themselves as attentive partners in their customers' journey. This not only enhances customer satisfaction but also establishes a foundation of trust, making it less likely for customers to consider alternatives. 

Thus businesses must utilise various communication channels, such as email, social media, and direct messaging, allowing businesses to reach customers where they are most comfortable. Timely updates, personalised messages, and relevant content contribute to a positive customer experience, ultimately reducing the likelihood of churn.

7. Offer Discounts and Incentives  

Companies that deliberately offer discounts or incentives to their consumers do more than just show appreciation; they also establish a concrete benefit for sticking with their products or services. These can take many different forms, such privileged access to specials, loyalty points, or exclusive discounts.

This strategy is a potent instrument for customer retention in addition to providing real value to the customer relationship. It fosters a sense of appreciation and satisfaction by encouraging clients to view continuing interaction as desirable from an economic standpoint.

Conclusion 

A churn rate in E-commerce is inevitable. A “good” churn rate varies anywhere between 2 to 8%. Furthermore, the average churn rate for the E-commerce industry is around 22%. While churn rate stats vary from business to business, it's essential to track this key metric to ensure that customers keep coming back to your products again and again. 

If you're looking forward to reducing your customer churn rate using conversational AI, we suggest you check out App0. App0 is here to help you out. It is a next-gen communication platform powered by machine learning (ML) & large language models (LLM) that allows you to embed communication features directly into your product with simple no-code integrations that don’t require additional developer bandwidth.

Here's why leading E-commerce giants trust App0 when it comes to reducing customer churn rate and improving lifetime value. With App0, you can guide your customers to order their favourite products anytime, hassle-free, with just a simple text—no downloads, accounts, or logins required! Moreover, it also has a chat-driven Seamless Checkout feature, which facilitates checkout for customers without having them exit the conversation thread. 

Getting started is a breeze; connect your data for tailored AI training. As customers text their concierge, our AI adapts learning preferences and behaviours to provide timely reminders and product recommendations. Let App0 transform your business by boosting retention and reducing churn rate—request a demo now and witness the impact firsthand!

Churn Rate in E-commerce: FAQs