Brands of all sizes feel the pressures of shrinking margins and rising customer acquisition costs (CAC). To combat these pressures, many are looking for ways to increase Customer Lifetime Value (CLV) to realize more return on their ad spend and increase profitability.
Ahead we’ll examine the importance of Customer Lifetime Value for your business and how building a fulfillment network to meet customer expectations can drive better, more profitable customer experiences.
On the run? Download our guide How to Win Customers for Life to learn how faster fulfillment increases Customer Lifetime Value.
What Is Customer Lifetime Value (CLV)?
Customer Lifetime Value (CLV) is a metric used to measure the amount of revenue a customer brings to a business over the course of their entire life cycle as a customer.
A customer’s life cycle can vary by industry. Household staples like cleaning supplies, for example, can have a very long customer lifecycle. We all have brands we reach for every time we go to the grocery store. And most of us know someone who will only buy one model of car for the rest of their life.
Other products have a limited life cycle – diapers and infant formula, for example. Most adults are only parents to young children during a limited window of time. Once their children outgrow those products, they no longer purchase them, regardless of how faithful they are to a single brand. However, when consumers become fierce brand advocates, they will recommend them to their friends and family.
Customer Lifetime Value depends not only on the length of the customer life cycle but also on the amount of money a customer spends over their lifetime. It’s important to find ways to re-engage with customers to encourage repeat purchases. Many brands do this by:
- Releasing a seasonal catalog or look book
- Regularly announcing new products
- Reminding customers when it’s time for a refill
- Suggesting complementary products for past purchases
- Setting up a subscription service that bills and ships automatically
Another popular tactic for increasing customer lifetime value is the subscription model. Amazon proved this model with its Prime subscription model (Prime members spend twice as much money on Amazon as non-members). It then doubled down on the subscription model when it introduced the “Subscribe and Save” option, allowing shoppers to have household basics delivered automatically on a recurring basis.
Why Does Customer Lifetime Value Matter?
Most merchants learn quickly that it’s less expensive to retain an existing customer than it is to acquire a new one. In fact, Harvard Business Review estimates that acquiring a new customer can be as much as 25 times more expensive.
Customers making a first-time purchase may want to dip their toe in, purchasing a small quantity or a low-value item until you gain their trust. Generally, most ecommerce brands don’t make a profit until a shopper’s third purchase.
It’s important to build strong relationships with customers on their first and second purchase to bring them back for additional purchases. Further, building trust will also make them more comfortable creating larger carts with a higher Average Order Value (AOV).
How to Calculate Customer Lifetime Value (CLV)
There are many ways to calculate customer lifetime value. For the purposes of simplicity, we’ll focus on a historic CLV calculation rather than a predictive one. One of the simpler CLV formulas is as follows:
Customer Lifetime Value = Lifetime Value x Profit Margin
Most brands understand that their profit margin is determined by how they balance their contribution margin against top-line revenue, but Lifetime Value is a variable that may be a little trickier to come by. You can find Lifetime Value by multiplying the following factors:
- Average value of sale: Total value of sales divided by total number of sales
- Number of transactions: Total transactions divided by unique shoppers
- Retention time period: Determine the time period you would like to measure retention
Starting with a simple historic CLV calculation gives you a baseline to return to as you improve your operations, optimize for customer retention, and return to this metric year after year to measure progress.
How to Increase Customer Lifetime Value with Fulfillment
A recent survey revealed that over half of merchants have seen lower margins this year, largely due to increased supply chain costs. To succeed in the current market, savvy merchants are looking to optimize their customer experience to increase Customer Lifetime Value (CLV), lower their Customer Acquisition Costs, and increase their margins.
In today’s digital-first retail environment, fulfillment and delivery are key factors in creating an excellent customer experience. eCommerce shoppers’ first physical experience with a product is the delivery experience, making fulfillment a key factor in increasing customer lifetime value.
In the video below, the CEO of Ware2Go (a UPS Company) explains how a fast, transparent, and cost-effective delivery experience drives customers back for a repeat purchase.
Fast Shipping Promises Attract New Customers
Fast shipping is an expectation for today’s consumers. In fact, a recent consumer survey revealed:
- 69% of consumers are more likely to click a display ad that mentions fast and free shipping
- 77% are more likely to purchase an item if it can be delivered to them in 2 days or less.
Additionally, merchants report that fast and free shipping promises are more effective than discounts or free gift offers at improving cart conversion rates. In fact, 65% of merchants report that a 1- to 2-day shipping promise improves cart conversion rates by up to 25%.
Fast Shipping Execution Retains Customers
While fast shipping promises can attract new customers, actually delivering on those promises can retain them. A recent study by Gartner revealed that poor supply chain performance can significantly decrease customer loyalty – even more than price increases.
All told, supply chain issues such as delayed shipments may decrease the chances of a repeat purchase by up to 87%.
On the other hand, 79% of consumers say they are more likely to make a second purchase from a merchant after a positive delivery experience.
Fast Shipping Incentivizes Higher Spend
The promise of fast shipping entices shoppers to add more items to their cart. In fact, 84% of consumers admit that they have added something to their cart to meet a minimum threshold to qualify for free shipping.
Larger carts create economies of scale and yield higher profit margins by:
- Offsetting pick, pack, and shipping costs
- Maximizing returns on marketing spend
Ultimately, customers who spend more money per purchase have a greater Customer Lifetime Value, driving more profitability for your business.
How to Build a Fulfillment Network to Increase Customer Lifetime Value
Faster shipping doesn’t mean more expensive shipping. Here’s how you can improve your delivery speed and increase sales without sacrificing margins.
- Distribute inventory closer to end customers. Fulfilling all orders from a single warehouse leads to slower delivery times or over-reliance on costly air shipments. Stocking additional warehouses in strategic locations enables you to reach customers in 1-2 days via UPS Ground.
- Find a flexible warehousing partner. Small to midsize businesses (SMBs) may not be able to carry enough inventory to stock multiple warehouses. A flexible fulfillment partner will aggregate your inventory with other merchants’ so you can stock smaller amounts of inventory in multiple locations.
- Lean on technology. Another barrier for many SMBs is finding out exactly where they should be stocking their inventory to enable 1- to 2-day ground shipping to all of their customers. Historically, a custom warehouse network built by a supply chain consultant is cost-prohibitive for SMBs. However, new technology that leverages machine learning and ecommerce fulfillment data can make network recommendations within minutes.
Looking for a custom warehouse network to reach your customers with faster shipping? Get a free analysis using Ware2Go’s self-service tool, NetworkVu.
