How to define churn for your ecommerce startup
Churn is a tricky thing to calculate because it varies among industries — and even companies in the same industry. But you need to have a good idea of what it means to you to define the lifetime value (or LTV) of your customers.
For SaaS, it’s easy: it’s just the percentage of customers that stop paying for their subscriptions in some period. But if you’re an ecommerce company, this may be more complicated. To figure out the best way to define churn for your business, you have to break the business down into smaller parts. And all this isn’t an exercise to make your numbers look good on a pitch deck. This is an essential metric for benchmarking your success as you start to grow your business.
Why do I need to be so specific when defining my ecommerce churn?
First, let’s review how you roughly define the lifetime value (LTV) of a customer:
Simple enough! The result, if it’s constructed properly, is a map of how much revenue you’ll generate over time from each customer you acquire. Well-defined churn can identify high-quality marketing campaigns or product changes, while poorly-defined churn can mask a lot of problems in the long run.
This is a remarkably useful metric, and you’ll have a better sense of how successful your customer acquisition efforts are as it changes over time.
Understanding your ecommerce customer profile
You probably think this is a straightforward answer: you’re selling something cool to your customers! But ecommerce can mean a lot of different things to a lot of different people, and every business is going to have its unique quirks. You need first to step back and think about your mechanics:
How do you charge for your products? You could easily define churn as the number of customers that stop paying every month (or year) and feel like you’re done. But there might still be more under the hood.
How often do you ship your products? Your churn model will differ if you’re shipping customers a product regularly or at the time of purchase.
Do you need to segment your customers? Think about the types of customers you have, such as power users versus periodic buyers. Customers that come from Facebook may behave entirely differently than those coming from Google. Some customers might be power users, while others buy infrequently.
Here are some examples to think about:
Where does the customer relationship end for ecommerce?
While losing customers is a natural process for any business, and a laundry list of things can affect that — NPS score, complaints, poor reviews, and so on — it’s important to define when they officially leave. This is where explicitly laying out the components of your core business come into play.
Most ecommerce companies rely on digital advertising regardless of their business model. But the dollar value you get out from feeding a dollar into a platform like Facebook will vary from company to company. Startups relying on individual purchases will likely need to continue to nurture a customer over time, while subscriptions have a direct touchpoint with their customers at any moment.
So as an example, it might look something like this if we were to define the period (T) as the time from last purchase to sending a third weekly reminder email:
Complicated, right? But even then, you might still need to segment it if your users have different behaviors depending on where they first find you. But you still want to get as exact as you can to help you plan forward.
Facebook users might need to regularly see your ads before they begin committing to regular purchases — and more after to keep them engaged.
Google users may only come in with the intent to buy one specific thing, requiring a different strategy to convert them to regular customers.
Broad paid acquisition (i.e., outdoor, print, direct mail) might attract customers with varying levels of quality because it gets in front of a wider variety of intent and interest levels.
Word of mouth/Direct might require a lot of advertising upfront but sustain more momentum over time.
So as we can see, churn is a critically important metric not just for outside parties evaluating your investors, but also yourself. There’s a good reason it shows up in most pitch decks for later-stage companies. If you want to create a robust and sustainable business, you’ll want to be able to accurately identify what is going well and what’s going poorly. It’s important to note that the definition may evolve as your business does. But setting a solid definition as a foundation gives you a strong starting point for thinking about the future of your business.