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A delayed delivery during Christmas

Impact of Late Deliveries on Customer Lifetime Value (CLV)

 Late deliveries have a huge negative impact on the Customer Lifetime Value (CLV), Customer Acquisition Cost (CAC), and Customer Retention Rate (CRR) of ecommerce businesses. This makes it critical for businesses to provide their customers a smooth, hassle-free last mile delivery experience every time.

Introduction

Online shoppers are clear with their order delivery expectations.

They want it free.

They want it NOW.

Do you sometimes feel, as a retailer, that despite paying a steep price to provide customers a top-notch delivery experience, you still struggle with their complaints? Do you feel it is unfair to be held accountable for delivery issues considering you foot every exorbitant charge mercilessly billed by UPS/FedEx/DHL? Shouldn’t these carriers be held accountable for late deliveries?

Unfortunately,the world is not always a fair place, and logistics is no exception.

Surveys have repeatedly shown that a majority of buyers refuse to shop from a retailer following a negative delivery experience. As if this were not bad enough, many such former customers end up posting damaging reviews on social media and forums that deter potential customers from buying from this retailer.

This can hit you pretty badly if you are just starting out and are still building a name for yourself. Ironically, such new businesses also have the least leverage over shipping since your delivery volumes are still not high enough to make you a priority customer for your shipping company.

A majority of buyers refuse to shop from a retailer following a negative delivery experience.

Oh the double whammy!

Customer Retention Vs. Acquisition

The truth of the matter is that acquiring new customers is costly work. It costs as much as seven times more to acquire a new customer than to retain an existing one. Also, your existing customers buy more from you and recommend your business more than new customers will.

For these reasons, it is critical you retain your existing customers at all costs.

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The best way to evaluate the cost of late deliveries is by weighing their impact on key ecommerce metrics.

It’s time now to learn these metrics:

  • Customer Acquisition Cost (CAC)
  • Customer Retention Rate (CRR)
  • Customer Lifetime Value (CLV)

Customer Acquisition Cost (CAC)

In the simplest of terms, Customer Acquisition Cost (CAC) is the cost of convincing a potential customer to purchase your product / service.

CAC includes the cost of marketing and sales. The higher your CAC, the more you need to charge your customers for using your product / service in order to make a profit.

The simplest way to calculate CAC is to divide marketing and sales costs combined for a period by the number of customers acquired during the period.

How to calculate Customer Acquisition Cost (CAC)

For example, let’s say a small business spends $100,000 in a year on marketing and sales. 2000 new customers buy its products during the year.

The CAC of this business can be arrived at by dividing 100,000 by 2000. The answer is 50, which means this small business spends $50 in marketing and sales costs to acquire each new customer during the year.

As I pointed out earlier, it makes more sense to retain an existing customer than to acquire a new one in their place.

Customer Retention Rate (CRR)

Customer Retention Rate (CRR) lets you know what percentage of customers still shop with you at the end of a period compared to at the beginning of it.

Loyal customers are worth up to 10 times as much as the value of their first purchase. Studies have shown that increasing customer retention even by 5% could lead to increased profits of between 25% and 95%.

Loyal customers are worth up to 10 times as much as the value of their first purchase.

Calculating CRR requires a few data points. These data points:

  • The number of new customers acquired during a particular period (N)
  • The total number of customers at the end of the period (E)
  • The total number of customers at the start of the period (S)

This is the formula to calculate CRR:

CRR = [(E-N)/S] X 100

In essence, to calculate the CRR for a particular period, deduct the number of new customers acquired during the period from the total number of customers at the end of the period, divide the resulting number by the total number of customers at the start of the period, and multiply the resulting number by 100 to obtain a percentage.

How to calculate Customer Retention Rate (CRR)

Let’s take a look at an example.

Let’s assume you want to calculate your customer retention rate for a particular year. You started the year off with 100 customers and lost 5 of them during the period. You acquired 10 new customers during the year.

At the end of the year, the total number of customers you have (E) would be 105 (keeping in mind the ones you lost and gained).

Now,let’s apply the formula to calculate the CRR for the year.

CRR = [(E-N)/S] X 100

That is,

CRR = [(105-10)/100] X 100

The customer retention rate for the year works out to be 95%, which is a good percentage.

Now’s the right time to tackle a big bull of a metric head on: Customer Lifetime Value (CLV).

Customer Lifetime Value (CLV)

Customer Lifetime Value (CLV) is a metric that is critical to the long-term viability of any business. It is the measure of how much a business can expect to earn off each customer during the course of their relationship. In other words, it is the measure of how much a customer is expected to spend on a business during their lifetime. The inference to be drawn here is that the longer a customer chooses to buy from a company, the greater their lifetime value. CLV is a foward-looking metric.

A cartoon about valuing the CLV of customers

Customer Lifetime Value comes in many avatars: The terms Customer Lifetime Value (CLV or CLTV), Lifetime Customer Value (LCV), and Life-Time Value (LTV) all refer to the same concept.

Calculating CLV is an exercise that helps identify important customer segments in terms of their purchasing power. Consequently, the bulk of marketing and sales efforts could be targeted at these segments for maximum profitability. CLV also helps to make decisions about how much money to invest in the acquisition of new customers and in the retention of the ones existing.

How to Calculate Customer Lifetime Value (CLV)

The way CLV is usually calculated is using the formula,

CLV = average purchase value for a customer segment X number of times a customer from a segment will purchase each year X average length of customer relationship for the segment.

Let’s assume you run an ecommerce site selling shoes.

A professional runner who is a frequent buyer on your site might be worth this:

$100 per shoe pair X 4 pairs yearly X 8 years (average professional career length for segment) = $3200

The mother of an infant might be worth this:

$20 per shoe pair X 5 pairs yearly X 3 years = $300

Now you know you will need to devote more attention to the professional runner than the mother of the infant in order to boost your bottom line moving forward.

This is the value of calculating CLV.

How to calculate Customer Lifetime Value (CLV)

The Impact of Late Deliveries on Metrics

Now that we know why it is important to track metrics, let’s take a good, hard look at how late deliveries affect these metrics.

Late deliveries have the effect of decreasing the CRR of your business. Most customers who experience a late delivery tend to abandon a business rather than stay on.

Late deliveries increase the CAC of your business. This is on account of the negative social media reviews and word-of-mouth interactions that need to be countered.

As far as CLV is concerned, it decreases (and drastically) because of late deliveries. Not surprising considering that customers who experience delivery issues don’t stay loyal to a business.

The Human Cost of Late Deliveries

Discussing the impact of late deliveries on metrics is useful, but the negative impact of late deliveries on the life experiences of regular people is even more important.

Think about these situations:

  1. A birthday gift reaching the destination a day after the birthday.
  2. What if Santa delivers that particular Peppa Pig life-size toy your child has been coveting for months, a day after Christmas?
  3. What if a shipping carrier delays the delivery of a very critical part that is of high priority in fixing a commercial jet or a major factory?
  4. What if a bunch of women entrepreneurs organizes a fair to raise funds for breast cancer, and UPS/FedEx arrives with the merchandise to be sold a day late?
  5. Life-saving medicine. Enough said.
  6. A five-year-old’s birthday party goodies: balloons, candles, party favors, candies, and snacks are delivered an hour late. Can you imagine a birthday party with bare walls and no candles?
  7. Winter gear lost in transit for a remote camp somewhere in Alaska.
  8. A containment of beachwear that fails to make it to the beach for summer.

We may safely assume that none of the customers in the above cases will buy from the shipper again. These are the instances when “We outsource our shipping needs to FedEx, UPS, or DHL” no longer work as excuses.

If you wish to retain your customers, you need to take certain measures to ensure they get the best possible post-purchase customer experience at all times.

How to Deal with Late Deliveries & Boost Customer Lifetime Value

Here are some things you can do at your end to deal with shipping delays and ensure your customers always get the best possible last mile delivery experience.

  • Create a loyalty program to encourage customers to buy more and often.
  • Under-promise and over-deliver on delivery dates.
  • Track your shipments in real time using a parcel-tracking service.
  • Keep your customers informed of package location at all times.
  • Send regular e-mail and SMS updates to customers about important parcel-tracking events, including delivery issues.
  • Upsell via your e-mail and SMS updates to spur further spending.
  • Make the ecommerce returns process free and as simple as possible. This will contribute to the overall comfort level of your customers.
  • Compensate customers for late deliveries by offering them coupons or discounts on future purchases.
  • Audit your shipments and claim refunds for delivery failures, including late deliveries (but remember, refunds don’t prevent customer churn).
  • For every delivery failure that happens, do a thorough analysis to understand the reasons.
  • Make your business accessible on social media channels to receive feedback and keep a tab on general customer sentiment.

A happy customer after a positive delivery experience

Last Word

While late deliveries are damaging to businesses of all hues, there are measures you can take to get ahead of them. When you prioritize providing a positive ecommerce customer experience and a smooth last mile, it will show on metrics like CRR, CAC, and CLV.

The key takeaway is that you have it in you to make the decisions that are in the best interest of both your customers and your bottom line.

Also Read:

Revathi Karthik

Revathi Karthik

Product Marketer, Customer Advocate, Unrepentant Book Hoarder

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