Customer Churn 101: Definition, Rate, Analysis & Reduction
Although the severity of this issue is not fully acknowledged, one of the biggest problems faced by ecommerce businesses is customer churn. Customer churn is an essential metric for every growing business to keep track of since it gives you a clear picture of how good - or bad - you are at customer retention.
As customer acquisition costs increase and competition for the available market grows, it is important for your business’s profitability that you put the necessary measures in place to reduce customer churn.
In this comprehensive guide, we’ll discuss everything you need to know about churn, down to definition, rate, analysis, reduction, and customer churn prediction. We’ll also shed some light on how the Core Teams can become your best friend in preventing customer churn for your ecommerce business.
Table of Contents
- What Is Customer Churn?
- How to Calculate Customer Churn
- Why Is Customer Churn Analysis Crucial?
- How to Reduce Customer Churn: 10 Strategies and Tips
- Preventing Customer Churn for Your Ecommerce Business
What Is Customer Churn?
According to the customer churn definition, this is the phenomenon where customers of a business no longer purchase the products and services offered by the business. Customer churn, therefore, refers to the number of customers that have stopped interacting with the business or buying the products and using the services put forward.
Predicting customer churn early on is important because there would still be sufficient time for the owners and the managers to make the necessary changes to prevent its negative impacts on their business. High customer churn rates may result in loss of revenue, increased customer acquisition costs, and negative reviews by the churned customers to their circles of influence.
Customer churn often points to poor customer experience, and, therefore, it should be regularly measured in whichever time frame is best for the business which could be monthly, quarterly, or annually. In any case, your business should aim for a customer churn rate that is as close to zero as possible.
Customer Churn vs Customer Retention
Customer retention refers to how often your already existing customers return and purchase the products and services offered by the business. On the other hand, the customer churn meaning refers to the number of paying customers who fail to become repeat customers and instead halt interactions with the business, its products, and services. So, customer churn is effectively the opposite of customer retention.
High customer retention rates are desirable meaning that your enterprise is successfully attracting repeat business and building solid customer loyalty. Companies with high customer retention rates are in a better position to thrive over time, since the lifetime value (LTV) of a customer is much greater when they return and transact with the business on a regular basis.
On the flip side, having a high customer churn rate is extremely detrimental for business since the paying customers have no compelling reasons to return. High customer churn rates rob the business of loyal customers which should be a major wake up call for ecommerce business owners to collect feedback in order to devise effective customer retention strategies.
How to Calculate Customer Churn
The customer churn rate - or rate of customer attrition - is a business metric that calculates the rate at which customers terminate the purchase of products and use of services offered by a business entity. The customer churn rate can also be defined as the percentage of service subscribers who discontinue their subscriptions within a specified period of time.
A high customer churn rate is most likely to negatively affect profits and revenue as well as to hinder the overall growth of your ecommerce business.
Customer Churn Rate Formula
The customer churn rate can be calculated as the number of churned customers by the total number of customers, multiplied by the number 100. Below is the customer churn rate formula:
Customer Churn Rate = Number of Churned Customers / Total Number of Customers x 100
Here are the steps that you can take to successfully carry out customer churn calculations:
- Identify a time period: monthly, quarterly, annually.
- Determine the number of customers that you had at the beginning of the time period.
- Find out the number of customers churned/that had left by the end of the time period.
- Divide the number of churned customers by the total number of customers at the beginning of the time period.
- Multiply the result by the number 100 to get the customer churn rate as a percentage.
Why Is Customer Churn Analysis Crucial?
Customer churn analysis is helpful in identifying weak points all through the entire customer journey, and the customer churn data generated is used in an effort to improve client communication and customer experience plus the quality of products and services.
Below are some of the major reasons why your ecommerce business should prioritize customer churn analysis:
Identifies Brand Weaknesses
Regularly analyzing customer churn is a great way to reveal what motivates customers to halt their relationship with the brand, products, and services. These weaknesses could include poor communication, bad customer experiences, low quality products, and price sensitivity. According to Zendesk, research shows that 66% of customers terminate their relationships with a company due to poor customer service. The customer churn data gathered can then be used to maximize what loyal customers love while improving what at-risk customers dislike, hence promoting customer retention.
Predicts and Reduces Future Customer Churn
Customer churn analysis involves scrutinizing historical customer data which makes prediction of future customer churn possible. This enables ecommerce business owners to make data-based decisions regarding which approaches are to be deployed in prioritizing customer retention, hence reducing future customer churn rates.
Is Cost Effective
When customer churn analysis is prioritized, the ecommerce business can leverage the data collected to predict customer churn and improve customer retention. This is cost effective since, as reported by Chargebee, customer acquisition costs are 5x higher than the cost of retaining already existing customers.
Prevents Reduction in Revenue
Customer churn analytics are key in foreseeing future customer churn which provides business owners with the relevant customer churn dataset necessary to reduce the loss of already existing customers. This prevents the reduction in company revenue that would otherwise occur if paying customers did not return and opted to take their business to the competitors in the market. Gartner research shows that 80% of a company’s future revenue will come from just 20% of its already existing customers.
How to Reduce Customer Churn: 10 Strategies and Tips
When customers are unhappy with the products, services, and the overall experience your business has to offer, your company is at high risk of customer churn resulting in lowered revenue and profits. Nonetheless, there are strategies that can successfully be deployed to reduce customer churn.
Following are 10 proven tips and tricks that you can use to prevent this negative business phenomenon:
Define Your Churn Goal
When it comes to running a successful ecommerce business, the overall goal in this case is to reduce customer churn. In order to make this goal more actionable, it is vital to both make this goal quantifiable and break it down further into smaller goals.
Defining churn goals allows business owners to measure the progress of their retention process and gives everyone else on the team knowledge of what they are aiming for plus what you want to achieve. Once your churn goals are set, you can start the process of reducing customer churn by studying the data and customer feedback collected to enforce a working customer retention strategy.
Analyze What Causes Customer Churn
Analyzing company data and understanding what causes customer churn in advance is a great strategy for ecommerce businesses to implement. The key is to use the data gathered before customer churn occurs in order to build effective customer retention strategies. This is a crucial aspect in predicting future customer churn and setting up strategies to proactively prevent or reduce it.
Ask for Customer Feedback
The simplest way to reduce customer churn is by asking your customers for regular feedback regarding their experience while interacting with the business. Customer frustration tends to surface when there is confusion about a product or lack of support surrounding a particular issue, ultimately leading to customer churn. This can be avoided early on when business owners take time to regularly collect feedback, by sending out monthly surveys or feedback forms via email.
Identify the Most Valuable Customers
Identifying the most valuable customers and going the extra mile to ensure that they have top notch experiences is another great way to reduce customer churn. Valuable customers often bring in the biggest revenue for the company.
Refocusing efforts on ensuring that the best customers are getting exactly what they signed up for keeps them on board, hence improving customer retention for your business.
Improve Customer Service
Another great way to reduce customer churn and stand out among competitors is by providing excellent customer service. Knowing that poor customer service is a major contributor to customer churn, business owners ought to provide their customer service representatives with the relevant training necessary.
Customer service representatives should be empowered and equipped with skills on how to engage the customers and efficiently resolve challenges in case any arises.
Provide an Omnichannel Experience
Engaging your customers on all the marketing channels about the products and services offered by the business is another effective strategy to reduce customer churn. Omnichannel experiences mainly focus on giving the customer a consistent, positive experience across all touchpoints, which keeps the customers coming back and recommending the brand to family and friends.
Providing sufficient and versatile content about the key functional benefits of the products as well as discounts and special offers on various social media platforms, websites, and via email is a great way to keep customers engaged.
Start a Loyalty Program
Offering incentives such as starting a loyalty program is a good way to keep customers coming back to interact with your business. Rewarding loyal customers goes a long way when it comes to showing your paying customers that you truly value their business. This is a great strategy to put to use for loyal customers who are nearing the end of their contact and those who give feedback related to canceling their subscriptions.
Core Loyalty can help you launch an AI-driven customer loyalty program in an effort-free manner.
It is very important, however, to ensure that the costs of the loyalty program do not outweigh the profits expected to be gained from the customers you intend to retain.
Streamline Onboarding for New Customers
New customers may find it overwhelming to get started with a new product or service, resulting in customer frustration and ultimately churn. That’s why it is essential for business owners to ease the transition by setting up onboarding processes for new customers to guide them through the product or service’s features and functionality. Customers will feel empowered to achieve success and make the most of your products and services, making it less likely for them to churn.
Pay Extra Attention to Complaints
When it comes to reducing customer churn, complaints are very useful, seeing as they bring to light challenges that are otherwise hidden from the business owner’s view. Tackling the problems that arise reduces customer churn, since dissatisfied customers whose complaints have been acted upon are more likely to remain loyal and even become advocates for your ecommerce business.
Target the Right Audience
Even the most effective customer retention strategies may seem futile if your company is focusing on the wrong audience. Reducing customer churn is easier when you are engaging the right customers. Developing customer profiles to have a clear understanding of the purchase behavior of your target customers is essential. The right customers can be defined as those who are engaged with your product, within your target market, and well-informed about transacting with your business.
Preventing Customer Churn for Your Ecommerce Business
In summary, reducing the customer churn rate comes down to creating an exceptional customer experience. Your ecommerce business cannot afford to lose any customers since this translates into lower profits, less revenue, and higher customer acquisition cost.
Having a working customer retention strategy is crucial to the reduction of customer churn and the overall growth of your ecommerce business. In order to simplify the process, Coretava is a great option to turn to for providing an omnichannel experience, starting loyalty programs, boosting ecommerce marketing efforts, enhancing on-site personalization, and much more.
Customer Retention: Meaning, Importance, Examples & Strategies
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Daniela has 6 years of experience in digital marketing for ecommerce businesses.
Aws is the Co-Founder of Coretava, a complete retail ecommerce growth platform. He has 6+ years of experience in managing and growing ecommerce businesses.