A business model fails when the customer acquisition cost (CAC) exceeds customer lifetime value (CLV)
Delhivery’s VP for business development and head of ecommerce, Rohan Shanbhag, explained at Inc42’s D2C Summit how brands could build their CLV
Here are some excerpts and insights from Shanbhag’s masterclass titled How D2C Brands Can Drive Up Their Customer Lifetime Value
On the last day of the recently concluded The D2C Summit, Licious cofounder Vivek Gupta emphasised that customer is king. It essentially means brands should ensure good customer perception and maintain a high level of customer satisfaction to scale and grow.
This has become all the more important during the Covid-19 pandemic as consumers across ages and geographies are moving to ecommerce. As of June 2021, India has 190 Mn online shoppers and this number is estimated to reach 300 Mn by 2026. So, it makes eminent sense for brands to work towards digital preparedness.
As more and more companies — both traditional and new-age — tap into ecommerce, the market is seeing a spurt in both opportunities and competition. Consequently, brands find it imperative to build and increase customer lifetime value (CLV) resulting in greater revenue generation and a bigger base of loyal shoppers. This is, indeed, crucial for businesses of all sizes and a key reason why Rohan Shanbhag, Delhivery’s vice-president for business development and head of ecommerce, chose the topic for his masterclass at the D2C summit hosted by Inc42.
“The advantage of going direct is that you can build a unique one-to-one relationship with a customer. You have the data, you can communicate more effectively and directly, and you can build a direct relationship to increase your customer lifetime value,” said Shanbhag.
As a benefit of the digital world, brands today are more connected and closer to their customers. This enables them to build with a purpose, keeping in mind customer sentiment and preferences. In spite of the digital leverage, building customer loyalty remains one of the biggest challenges for D2C brands in India and abroad.
What Affects And Alters Customer Lifetime Value
Simply put, CLV is the overall value of a customer to a business throughout their relationship. It also allows a brand to determine a reasonable customer acquisition cost (CAC). At times, entrepreneurs are overconfident about their ability to acquire customers, but the business model fails when the CAC exceeds CLV. According to CB Insights, 70% of tech companies fail within 20 months after receiving their first round of funding.
Although many factors affect CLV, most of these are related to people’s post-purchase experience. According to Shanbhag, there are four key factors and some additional ones that affect and alter CLV. Here is a quick snapshot of the major pain points:
- Inventory out of stock: It affects a customer when a brand commits to taking an order on its platform but runs out of stock before the order placement/delivery can be completed.
- Too many bespoke tools that don’t talk to each other: While receiving an order, shipping it, or enabling product recalls, multiple third-party software systems have to talk to each other (they connect for data and interoperability) to make it a seamless process. Failure to do the same results in the customer failing to receive adequate information or help and thus losing interest in the brand/product
- Inadequate delivery-related information: When a brand does not share adequate information regarding a product delivery — such information may include an estimated arrival date, shipment tracking and more — buyers are bound to find it inconvenient.
- Delayed delivery: If a brand has a delayed delivery time, a customer is likely to bounce at the checkout point. “I am talking about a time frame of more than 10 days. If a brand offers a unique product that one can’t get anywhere else, and the consumer really wants it, it is possible that the person will wait for 10-14 days,” explained Shanbhag. But in any other scenario, the brand will lose the customer, he added.
Other CLV pain points include failed delivery attempts failed, delayed refunds and a poor product return process.
How Brands Can Cope With CLV Woes
After taking his audience through the most important factors that could affect the CLV of any business, Shanbhag explained how building a robust supply chain would help brands counter the most common CLV challenges. His solutions broke down into three major areas:
Integrated approach
According to Shanbhag, a brand may have different effective and discrete systems that have to talk to each other to operate seamlessly. “If they don’t do that, the information reaching the end consumer will not be clear,” he said.
Today, most of the D2C brands are leveraging, both, their native websites and ecommerce marketplaces — Flipkart, Amazon and the like — to sell their products. All these systems speak and look at the brand’s inventory independently and may not be plugged into the brand’s inventory port that may sit across multiple fulfilment centres (FCs).
Shanbagh stressed the importance of integrating these systems with the total inventory that reflects the right stock across all platforms, failing which can cause the customers to see the lack of stock on that specific platform.
To deal with this, brands should have an integrated channel order management system. It means all the orders should flow from different channels into one portal, and all the systems should see the actual inventory. With this integration in place, all the systems working together will know how much stock a brand has and where its orders are generated. This will also help brands communicate clear delivery timelines to customers.
Reducing Delivery Time
Ever since Amazon started its next-day delivery, the ecommerce industry, in general, has seen brands trying to provide a quicker delivery experience so that they will not lose customers. Companies no longer live in a scenario where customers will wait 10-14 days for an order. In fact, businesses risk losing the customer and the order due to such delayed delivery.
Shanbagh advised brands to focus on their FCs to counter this challenge and increase the CLV. He came up with three questions that need to be answered in this context, adding that “all three have to tie together to create a faster experience for the consumer”. Here is a look at the three fundamentals:
How many FCs are needed?
A fairly self-explanatory question. It requires a business to look at the existing FCs and do some math regarding order volume and order locations to arrive at a satisfactory number. Having multiple regional FCs in place is always more beneficial as these will speed up product delivery.
What is the FC’s capability and how does it work?
This requires focussing on how sophisticated and streamlined the FC is when it operates. “We have seen a website saying that it ‘does not pack and ship orders on Saturdays, Sundays and holidays’. While that is great for work-life balance, communication, it means if you have a sale on a Friday, you can only ship it on a Monday. Essentially, you have already lost two to three days between order and shipping,” said Shanbagh.
What about the FC location?
For any D2C brand in today’s era, keeping its FCs closer to the customer hubs is a good rule of thumb. “In the physical retail world, we say location, location, location! For this, it is crucial to bring the shipment closer to consumers. The same philosophy also needs to be applied in the ecommerce world. Plus, it solves a big pain point, the RTO (return to origin) rate, to be precise,” concluded Shanbagh.
Catch all the sessions from the D2C Summit — from Shanbagh’s masterclass to insights from other D2C enablers and the VC ecosystem to the experience of new-age brands like SUGAR — all at The D2C Academy.
