What is Churn Rate and How to Calculate It?

What is Churn Rate

Before you can put together a solid e-commerce customer retention strategy, you must first understand how quickly new clients are leaving your business. Customer Churn/Turnover Rate, often known as CCR, is the statistic that will provide you with a bird’s eye view of the problem.

Knowing how many customers are disengaging with your brand in a given time period can help you optimize retention, and maximize customer lifetime value (CLTV) over time.  

Simply put, Customer Churn Rate or CCR is the rate at which you lose consumers during a specific period of time. 

Why should I care about the customers who have departed? 

We’d say that this statistic can tell you how much effort it will take to keep your clients, and whether or not your retention strategies are effective.

Basically, CCR should be as low as possible for any given e-commerce brand.

Your customer churn rate can directly impact, or be a result of, your varying CLTV and overall customer loyalty.

In this blog, we will see how to calculate CCR and other meaningful metrics relevant to your growth.

Let us get going!

How to Calculate Customer Churn Rate?

Customer Churn rate or CCR can be calculated by = [(Number of customers at the beginning of the month) – (Number of customers at the end of the month)] / (Number of customers at the beginning of the month).

By determining how many customers you lost and dividing it by how many customers you had, you’re able to see what percentage of shoppers are choosing not to come back every month.

Keep ‘Repeat Purchase Ratio’ in Mind

Repeat Purchase Ratio or RPR is a direct indication metric for your customer retention efforts. RPR basically tells us about the percentage of customers who have made more than one purchase from your brand.

The higher the RPR, the better your overall growth will be. Why? Because repeat customers spend up to 33% more than new acquisitions. Moreover, an average repeat customer is likely to spend 67% more in their 30-36 month relationship with a brand compared to a 0-6 months old relationship.   

Fundamentally, your RPR shows you how your overall retention strategy is playing out. You can calculate RPR by the simple formula;

RPR = (Number of customers who bought more than once from you in a given time period) / total number of customers in that time period).

Try a Customer Loyalty Program to Boost Your RPR

Deploy a thoughtful Customer Loyalty Program. A close analysis of the purchase patterns of your cohorts can reveal insights into making an impactful loyalty program. E.g. your key demographic might be working mothers in tier-1 cities. You can offer them a 10% lifetime discount if they keep buying from your online store. 

Maximum Your CLTV to Boost Customer Loyalty

One way to minimize your CCR, obviously, is to find effective ways to boost your Customer Lifetime Value, 

In e-commerce, it is much easier to sell products to existing customers than it is for new shoppers. Returning customers are also more likely to purchase repeatedly. For instance, the probability of selling to an existing customer is 60-70% compared to just 20% for a new customer.

Marketers who know this can focus on these groups of people to drive CLTV (customer lifetime value), which will increase customer retention and revenue over time. Thus, incentivizing your repeat customers is one of the proven ways to maximize CLTV-revenue from your existing list.

CLTV is the best approach for Customer Loyalty

The Pareto Principle, which hypothesizes that 80% of your revenue comes from 20% of your customers, says a lot about why should you focus on CLTV.

When calculating your brand’s CLTV (Customer Lifetime Value), you get a better idea of which customers are worth more than others. This makes it easier to run limited-time campaigns targeting these individuals and thus increase their spending in the long term.

Segment-based targeting is extremely critical, especially considering that just a 5% increase in customer loyalty can boost your profits anywhere between 25% to 95%.

How to calculate your CLTV for CCR Optimization?

There are four KPIs that determine a customer’s lifetime value. These are;

  • Average Order Value (AOV)
  • Purchase frequency (F)
  • Gross margin (GM)
  • Churn rate (CR).

Each of these metrics helps to identify what factors must be addressed to maximize profit.

Your CLTV is calculated by the formula:

CLTV = AOV*F*GM/CR

Let us now see how to calculate these different metrics given above!

Calculating AOV

AOV = Total Sales Revenue/Total Number of Orders

Calculating Purchase Frequency (F)

F = Total Number of Orders/ Total Number of Unique Customers

Calculating Gross Margin (GM)

GM = Total Sales Revenue – Cost of Goods Sold (COGS)/Total Sales Revenue

Here, COGS is calculated by;

COGS = (Beginning Inventory + Additional Purchases – Ending Inventory)

Focus on Repeat Purchase Campaigns to Minimize CCR

Repeat purchases are the most important factor for CLTV, so it is crucial to get your target customers back into the store.

An effective way of doing this would be through reward points or point programs that incentivize returning customers with discounts and other rewards as they accumulate by buying more from you.

For instance, Rewarding customers with free shipping for repeat purchases and a discount on their second order will help create loyal customers while also upselling them on an item similar to the one they’ve purchased.

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Stay tuned for marketing automation tips, hacks, and playbooks for supercharged e-tail growth 🙂

Saad Mohammad

Saad Mohammad

Full-time marketer, part-time guitar player, and a football fanatic. Saad is a Digital Marketer with 6+ years of experience in the industry.

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