In the ecommerce industry, we devote a lot of time and effort to understanding how customers interact with products. Metrics like purchase frequency, average order value, and customer lifetime value get a lot of our attention because they help us understand the behaviours we desire most from our customers. However, for every action there is an equal and opposite reaction and on the other side of those value driving figures we find metrics like churn. So, what is churn?
While it can be unpleasant to think about, understanding churn and the conditions that cause it will have a huge impact on how your customers relate to your brand. After all, the first step to minimizing your customer churn rate is understanding it.
How Do I Calculate Customer Churn Rate?
At its simplest form, churn is the customers you lost over the customers you started with. This division allows you to see “churned customers” as a percentage of your customer base.
Using this formula you can calculate the lifetime churn rate of your business. Just divide the total number of customers you’ve lost by the total number of customers you have. In this way, your churn rate answers the following question:
How do you figure out if and when a customer is lost? The answer varies between industries. To come up with an estimate for your business you’ll need to analyze your customer data. First, segment your customers by purchase frequency, then justify a point at which your data tells you that if they haven’t purchased in a certain amount of time, they are likely to have churned permanently.
For example, let’s say that after sorting your customers by purchase frequency you realize that around 95% of your customers who have not made a purchase within a year never return to purchase again. You could then use 1 year as a benchmark for churn calculations because if a customer goes a year without purchasing, your data tells you they are unlikely to purchase from you again. It’s not a perfect estimate but it’s a great stand-in to use for quick retention health checks.
Lifetime churn is a powerful statistic but for ongoing analysis it may be easier to calculate churn on a per-period basis.
The per period formula above depends on knowing the number of customers lost over a period, which is often easier said than done. To calculate the number of customers lost it may be helpful to consult the formula below. It presents your customers lost as the difference between customers from the current period and the customers from the last period after accounting for new customer acquisitions over the period.
To illustrate, let’s say you had 100 customers last quarter and 125 this quarter. 30 of these were new customers, and you’d like to calculate your churn rate for the period. You’d start by calculating the customers lost using the above formula.
This shows you that though you grew your customer base from 100 to 125 this quarter, 5 of your customers still churned. Some analysts get distracted by growth numbers and fail to examine the churn under the surface.
It’s important to note that you can still have churn while experiencing customer growth. In fact, your growth is the difference between acquisitions and churn so reducing churn has as much of an impact on your growth rate and revenue as customer acquisition, and over time, much more.
To calculate your churn rate for the period, you would return to the per period formula, which with our variables would give us:
So there you have it. Churn rate the quick and easy way. Now that you’ve got your churn rate you’ve opened the door to a couple more related metrics that can help inform your strategy.
What Other Metrics Are Affected by Customer Churn Rate?
Average Customer Lifetime (ACL)
Churn rate can serve as a great shortcut to average customer lifetime as the two figures are inverses of each other. By taking 1 divided by your churn per period you can estimate how many periods the average customer will be with your business.
For example, if you have an annual churn rate of 20% then dividing 1/0.2 results in a 5 year ACL. Similarly, if the weekly churn rate was 4% then you’d have 1/0.04 which would yield an ACL of 25 weeks. Average Customer Lifetime is an extremely useful variable for numerous customer calculations including Customer Lifetime Value.
Another easy metric to calculate with churn is your retention rate. This is the percentage of your customers who return to your product or service over the period. This is another inverse for churn rate.
Every customer you started with will either remain a customer or churn by the end of the period and this binary relationship makes it very easy to calculate one statistic if you have the other.
2 Ways to Decrease Churn Rate
Now that we’ve discussed how to calculate your churn rate and some of the other stats it can help you understand, let’s attack how to decrease your churn rate and keep more of your customers coming back to your store.
1. Delight Your Customers
The most fundamental way to decrease your churn rate is by keeping your customers happy. While you definitely want to avoid letting them down, you have to look for areas to go over and above your customer’s expectations and delight them.
Impressing your customers is an integral factor in the level of customer satisfaction your brand evokes in your target market. Many marketers view customer satisfaction like a light switch; something that is either on or off but in truth, customer satisfaction is more like the weather. There are sunny days and rainy days but there’s also a lot in-between. Satisfaction with a brand works in much the same way, it exists on a continuum and just like the weather it can change in a hurry.
Just like the degrees on a thermostat can change what we do on any given day, the degree of customer satisfaction governs the behaviour of your target market. As you gain higher levels of customer delight customers start to perform positive, value affirming actions like repeat purchasing or becoming a brand ambassador. On the other hand, when your brand evokes lower levels of satisfaction customers are at risk of churning or even worse: becoming a detractor (a customer who actively steers others away from your brand).
Every interaction that customers have with your brand is an opportunity to deliver customer delight and move them up the satisfaction scale. Whether it’s information they find in the pre-purchase phase, your product itself, the rewards in your loyalty program or even the support they receive when something goes wrong, each time a customer interacts with your brand you have an opportunity to move them further along the customer satisfaction continuum.
2. Create Switching Costs
Switching costs are any cost that a customer incurs by trading one product or service for another. Higher switching costs naturally reduce churn by reducing the likelihood that a customer will switch to a substitute product instead of returning to your brand.
Traditionally marketers have shied away from creating switching costs for fear of “imprisoning” their customers and creating a relationship based on forced commitment rather than genuine affection for the brand. To see the dangers of this kind of customer relationship you don’t have to look much further than the telecommunications industry where switching costs take the form of harsh financial penalties and a cancellation process that is challenging, to say the least.
That being said, switching costs don’t have to feel like a prison! In fact, they can actually be positive elements of your brand that help build relationships with your customers. Features like personalized data can be switching costs that make a customer appreciate the product they currently use.
A great way to generate positive switching costs is through the implementation of a loyalty program. By rewarding your customers for purchases and other actions you’re not only incentivizing them to interact with your business, but you’re also providing them with value that acts as a switching cost. This gives those customers something to lose by leaving your service in the form of points or progress towards a reward that they will have to walk away from when switching to another brand. The effect of rewards as a switching cost can be subtle, but powerful, giving your customers a little something in return for a significant impact on your customer churn rate.
How to Learn From Your Churn
They say that all good things must come to an end, and this idea extends to customer relationships. Churn is a natural part of doing business and there isn’t a brand on earth that boasts a 0% churn rate. However, by understanding your churn rate, delighting your customers, and creating switching costs, you can reduce the impact churn has on your business. So dig into the numbers, learn from your churn, and drive the kind of retention that takes a brand from good to great. You’ll be glad you did.