If you’re not obsessed with your LTV (lifetime value) metrics, then you’re about to be.
Customer LTV is one of the most powerful factors for calculating your business’ current and future success, telling you exactly how much a customer is worth and how valuable they are to your business.
What’s even more interesting is the effect that 2-day and next-day delivery has on LTV, and how fast fulfillment can generate faster ROI from your acquisition costs while increasing your customers’ long-term profitability.
What is LTV?
Lifetime value (also known as customer lifetime value or LTV) is the average amount of money a customer brings to your store over their period as your customer.
It’s a customer retention metric that tells you how loyal and profitable your customers are overall. A high LTV shows customers visit your store regularly and spend a decent amount of money each time, and a low LTV indicates the opposite.
How to measure LTV?
The calculation for LTV is:
Customer value* x Customer lifespan**
*Customer value = average purchase value (total revenue / no. purchases) x average purchase frequency (no. purchases / no. unique customers).
**Customer lifespan = the average number of months or years a customer continues to purchase from you.
You can calculate LTV over the lifetime of your business, for individual customer demographics, or a specific period.
For example, if a store achieved the following:
- Average purchase value: $20
- Average purchase frequency per year: 4
- Customer lifespan: 2 years
Its LTV would be = $160 (($20 x 4) x 2).
Why is LTV important for eCommerce stores?
Customer retention is vital, and repeat purchases generate higher profits, greater marketing ROI, and customer reviews.
Well, LTV is a metric that helps improve customer retention and makes your business even more profitable. How?
- Cost per acquisition: LTV tells you how much you can spend on acquiring customers to make a long-term profit, even if you make an initial loss.
- Customer segmentation: LTV identifies your most profitable customer personas so you can focus on attracting these shoppers to your store.
- Customer churn: LTV helps pinpoint when customers because disinterested in your brand, allowing you to improve long-term engagement methods.
How 2-day and next-day shipping affect LTV
Many factors affect LTV, but we’re focusing on 2-day and next-day delivery because they influence this metric at three key stages:
1. Acquiring customers
To generate LTV, you must acquire customers with LTV in mind. This means attracting and converting shoppers with a memorable experience that they want to repeat in the future.
Free 2-day and next-day shipping create this experience through:
- Visibility: making your store stand out in search results, ads, and on social media.
- Ease: making it easy to order your products, regardless of the urgency.
- Convenience: providing an accurate date for delivery.
- Value: providing something of value to reduce the perceived overall cost and seal the deal.
However, according to Propeller, the average customer acquisition cost for consumer goods is $22.00. Suppose you sell $5 makeup pallets at $30, which cost $7.85 to deliver in 2-days. This leaves you with negative profit -> $30 – ($5 + $22 + $7.85) = -$4.85
The rule of thumb is it costs five times more to acquire a customer than retain one. This means, in the above example, it costs an average of $4.40 to generate a second purchase.
So, when that customer returns a second time, you make a profit that covers your previous loss and the cost of offering 2-day shipping -> $30 – ($5 + $4.40 + $7.85) = $12.75 profit
The more times the customer returns, the more return you get from spending $7.85 on free, fast shipping the first time – it’s an investment with the potential to yield significant gains.
Essential reading: Cost per acquisition across marketplaces
2. Remarketing your store
Remember when we said fast delivery creates a memorable experience that customers want to repeat — well, now’s the time to remind them about it.
eCommerce remarketing is just what it sounds like; Marketing to existing customers to remind them about your store, introduce them to new products, and attract them back to your website.
By including references to your next-day and 2-day delivery options in your remarketing campaigns, you ignite positive memories of the customer experience while reminding customers about the benefits of shopping with you.
Different ways to use 2-day and next-day shipping in your follow-up communication campaigns include:
- Emails: adding fast shipping banners and logos in your email campaigns.
- Social media: adding fast shipping tags to your Facebook and Instagram ads and product images.
- Google Shopping: adding fast shipping badges to your Google Shopping ads.
- Surveys: asking customers about the delivery experience in post-purchase customer surveys.
3. Generating repeat purchases
The goal of LTV is generating ongoing repeat purchases from the same customer, ideally with them spending more money each time they visit your store.
And, you’ve guessed it, 2-day and next-day delivery help.
- Benefits: 2-day and next-day delivery provides shoppers with ongoing confidence and convenience — exactly what attracted them through the checkout in the first place.
- Value: free 2-day and next-day delivery becomes a value-added service, encouraging customers to spend more each time they shop with you and giving them less reason to shop around elsewhere.
- VIP treatment: when you offer existing customers free 2-day or next-day delivery, you show you care about them as loyal customers, and you work hard to create an outstanding experience every time they shop with you.
LTV and fast shipping in action
The best way to demonstrate the power of 2-day and next-day delivery for generating high LTV is looking at the biggest eCommerce seller in the world: Amazon.
Amazon uses free and fast shipping to generate high LTV through Amazon Prime.
Prime members get unlimited access to 2-day and next-day deliveries, which results in them spending 133% more per year than non-Prime members and being more likely to buy from Amazon Prime than another retailer’s website (93%).
And despite Prime coming with various benefits, customers rank fast and free shipping as the main reason they choose to shop with Amazon. Shipping matters when it comes to LTV.
2-day and next-day shipping is an investment that can return significant gains for your business through customer LTV because, remember; a customer is for life, not just for Christmas!