Imagine two skin care businesses. One sells a $50 cream and the average customer typically buys it once. The other sells a $50 cream and the average customer buys it once a month over a year. Assuming the two businesses and products are otherwise the same, who has a better business?
The second company, of course. Its customer lifetime value (CLTV), or the amount a customer spends with the company throughout their relationship, is much higher. Instead of a new customer being worth $50 (one purchase), a new customer is worth that times 12: ($50 x 12), or $600. This means more can be spent on customer acquisition, as well as customer and product development.
The difference between these two companies is the ecommerce churn rate. Knowing (and understanding the reasons behind) churn rate can help a business assess how it is faring against the competition, and is a metric of customer retention—which positively impacts profits and revenue. According to a Bain & Company report, “A 5% increase in customer retention produces more than a 25% increase in profit.”
What is churn?
In business, “churn” is when a customer doesn’t return to buy again.
The term has its roots in baking: to “churn” milk or cream is to agitate it (by shaking or turning) until it turns into something else—butter. Then, take that and apply it to business. If you cause your customer to churn, you may have agitated them (or let them down), so they turned to an alternative option—the competition.
Churn is most commonly measured in subscription-based ecommerce businesses. Since these types of businesses typically default to a recurring payment, it is obvious when a customer opts out of that recurring payment, which counts as churn.
For a non-subscription-based ecommerce business, your customers won’t have a measurable moment in which they opt out. But that doesn’t mean you don’t have churn. There is some percentage of customers who will never buy from you again—and understanding that number is crucial to your business.
How to calculate churn rate
There are multiple ways to calculate churn rate based on the type of business.
Subscription ecommerce businesses
For subscription ecommerce businesses, calculating churn is simple to calculate for any given calendar window (often a month or year), using a customer’s time of cancellation:
(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
It’s important to consider the “New customers acquired in the period” in this formula. If you only review your total change in customers in the period, it’s possible that your online store’s newly acquired customers would “hide” the churn from your existing customers. The formula, as laid out above, avoids falling into this analysis trap.
For example, if you have 100 customers on October 1, 105 customers on October 31, and acquired 10 customers in the month, your churn for October would be 5%:
(100 - 105 + 10) / 100 = 5/100, or 5% churn rate
Many Shopify subscription apps will calculate this for you using the same methodology.
Regular ecommerce businesses
There is both confusion over (and debate about) how online stores without subscriptions should measure churn. It can seem like a daunting challenge. After all, a customer could technically always come back and buy again, right? So how can we say for sure they’ve officially churned?
In reality, you can’t say with 100% certainty. But you can create a simple model to report churn with a high degree of confidence. To do this, take the following steps:
- Understand your average repeat purchase timeline. In other words, on average, how long does it take before a customer purchases again? To find this, export orders from your repeat customers and measure the average number of days between their orders. If you don’t have a large history of data, you can just estimate it based on what you know about your customer behavior.
- Use customer cohorts instead of cancel windows. With subscriptions, you can calculate churn based on when the customer actively cancels, which officially makes them no longer a customer. For example, you might find that churn rate in October 2022 is 5% based on customers that canceled in October. But businesses without active cancellations can’t be measured this way. Instead, you would group customers based on their date of first purchase, and all activity after that. This is called a “cohort.” For example, you may define a cohort as all customers who purchased in January 2021, and then look at that cohort over the next 12 months.
With these two concepts—average repeat purchase timeline and customer cohorts—you can confidently measure regular ecommerce churn:
For any customer cohort, their churn rate is the percentage of customers who didn’t reorder over a timeline of two times the average repeat purchase timeline.
To illustrate, revisit the skin care company scenario. This time, assume the average repeat purchase timeline is three months. You can measure the churn rate of the January 2022 cohort in three steps:
- Look at customers who placed their first order in January 2022.
- Then, review what percent of those customers ordered over the following six months (to the end of July 2022).
- If they had 1,000 customers in January 2022, and 300 of them reordered in the following six months, that cohort would have a churn rate of 70%.
Cohort-based churn measurement can unlock powerful customer engagement insight, especially if you are making changes to products or customer service over different cohorts. If you have a Shopify store, you can improve retention rates by building customer groups based on customer engagement, or lack of engagement.
What is the average customer churn rate?
Churn rate is always industry-specific. Some product types are naturally low-churn, or “sticky,” because it keeps customers coming back, while others are naturally high-churn, because buyers only buy it when they need it and it’s a long-lasting product. However, to give a reference point across all ecommerce stores:
For subscription businesses, a 5% monthly churn rate would be considered average, according to research by Recurly.
For single-purchase businesses like skin care or a typical fashion brand, about 75% churn per cohort would be considered average. That means an average cosmetics or apparel ecommerce store can expect roughly 25% to 26% repeat customers who purchase a second time.
Three ways to reduce churn rate
There are three ways a customer retention strategy can improve customer attrition and retain customers:
1. Product experience
When companies have churn issues, they often look at everything but the product itself. If you have a higher-than-average churn for your industry, your product may not be meeting your customers’ expectations. How do you improve the experience? Start by conducting customer interviews and reviewing customer satisfaction surveys to see if your customers love your product (and feel it’s worth the price). Nothing builds customer loyalty like having your product deliver a great customer experience.
2. Aligning purchase cycles
Whether your business is a subscription-based model or sells a single-purchase product, one of the most common reasons for churn is not aligning timing with customer behavior. For subscriptions, this means providing different timing options for regular repurchase cycles. If it takes a customer six weeks to finish using your product, make sure they have a six-week cycle option (and a 12-week option for infrequent use). Similarly for single-purchasers, make sure automated post-purchase emails check in with the customer at an appropriate interval.
3. Customer serviceGreat customer service can’t always improve churn, but poor customer service can easily make it worse. All it takes is one poor interaction with a customer support team or a single order shipped to the wrong location for a valuable customer to say, “I’ll try somewhere else next time.”
Churn rate in ecommerce FAQ
What is churn rate in ecommerce?
A churn rate is the percentage of your existing customers who do not reorder. Typically, this can only be calculated after enough time has passed that the business can be reasonably confident a customer won’t return.
Which is better: a higher churn rate or a lower churn rate?
Generally, a lower churn rate is better, as it means more customers are reordering.
What does a 30% churn rate mean?
This means for a given period (usually a month), 30% of customers either didn’t reorder or opted out of their subscription.