Returnalytics: Impact of Returns on Customer Lifetime Value

Importance of Customer Lifetime Value

About the Episode

The Returnalytics podcast discusses the latest retail trends, technology, and best practices for managing an ecommerce business and retail returns.
We have conversations with the best and the brightest in the online shopping ecosystem (ecommerce store owners, partners, and thought leaders) while we do our own digging to uncover the real truth behind running an ecommerce store.
Listen in as we uncover how retailers can manage and optimize their returns strategy, saving time, and labor, and ultimately increasing customer loyalty and lifetime value.
In this episode, we tackle a hot topic in ecommerce retail:

customer lifetime value (CLV).

Why is customer lifetime value an important metric for retailers to pay attention to? How do you calculate it? How does a retailer’s returns management impact CLV? We get into it all in this episode.
Listen to the full episode on Spotify or get the summary below.

About the Speakers

Travis Farey

Travis is a Product Marketing Specialist at ReturnLogic. Travis graduated from Shippensburg University with a Bachelor of Science in Supply Chain Management & Marketing. Travis has been working for ReturnLogic for over 2 years and started out as a Customer Support Specialist before working his way into Product Marketing.

David Gonzalez

David is a Senior Growth Manager at ReturnLogic, previously working as a Product Marketing Manager. David has prior startup experience formerly working at Drip and WhenIWork. He works closely with the Product, Sales, and Marketing teams at ReturnLogic to act as the voice of the customer and how to understand the ecommerce market.


Episode Transcription

Travis Farey – 0:00
Hi, I’m Travis Farey and this is the returns management podcast by ReturnLogic; the show where we connect ecommerce store owners together through casual discussion and examine current myths and trends to keep you up to date on everything happening in the ecommerce world.
In today’s episode, we’re discussing the impact that returns have on customer lifetime value, or as we sometimes call it CLV. 
First, we’ll go over the history of CLV. Then we’ll take a look at how the industry defines and calculates CLV. Next, we’ll look at the impact that discounts have on CLV and how returns data can increase CLV. And lastly, we’ll discuss why retailers should care.
My name is Travis Farey and I’m a product marketing specialist here at ReturnLogic. And today, I’m joined by David Gonzalez senior growth marketer here at ReturnLogic. So without further ado, let’s get this show started.
Let’s start off by first discussing the history of customer lifetime value and how the industry has made a switch from focusing on customer acquisition to focusing on customer retention.
David Gonzalez – 1:29
Yeah, good call out. It’s really important to first distinguish between acquisition and retention here. So customer acquisition refers to finding ways to create net new customers. Whereas customer retention focuses on retaining customers that have already purchased from your brand, which actually ends up being seven times cheaper.
The key to retention is repeated activity. So getting shoppers to keep visiting your site, and interacting with your brand. So retailers that focus on only acquisition are not truly seeing the proxy of health for their business. Acquisition only shows why someone has come to the brand, not why they have left. So not being able to see what’s going wrong will lead to improper segmentation and ultimately the loss of a customer.
Travis Farey – 2:13
Exactly. That’s a great way to put it. It’s important that retailers also consider the context of returns and retention together. Often times the people who return the most items, have the highest customer lifetime value and make the most purchases, leading them to be some of your most profitable customers.
In fact, I read an article written by Yotpo that held some interesting statistics. Did you know that 14.7% of all shoppers are returning shoppers, and they actually account for 33.3% of the overall dollar spent? Returning shoppers also spend nearly three times as much as one-time shoppers.
Bottom line, the ability to return products and the ease of use to do so is an important factor in whether a shopper is willing to buy from a brand for a second time.
David Gonzalez – 3:10
Absolutely. Yeah, that’s a great call-out. Now that we discuss the difference between retention and acquisition and have gone over how these impact customer lifetime value. Let’s look at some of the definitions that the industry gives customer lifetime value and see if it aligns with how we define customer lifetime value.
Travis Farey – 3:27
Yes. Of course. So Shopify defines CLV as:

"Profit associated with a particular customer relationship, which would guide how much you're willing to invest to maintain that relationship."

David Gonzalez – 3:40
I mean, that, that’s so ambiguous, but it’s probably for good reason. How does that apply to returns?
Travis Farey – 3:46
That’s a great question. So, customer lifetime value is a metric that estimates the total monetary value that an average customer will contribute to a company over the customer’s expected lifetime. So CLV conceptualized the sum of all transactions including purchases, returns, shipping costs, etc. for an individual. However, calculating the true cost of a return and the impact that it has on CLV has been a mystery or at least an afterthought for most. So the real question is what does a return cost?
David Gonzalez – 4:24
So I was speaking with one of our analysts the other day and I finally did get an answer to this question. I’m gonna tell you, you’re not gonna like it or remember it. But, I’ll tell you anyway.
So the total cost of a return is equal to:

the lost sales revenue + the refunded purchase loss + the shipping loss per return + loss of product value + the labor cost per return for your warehouse and customer support team.

Calculating a Return
Computing the total cost of a return can get complicated.
Travis Farey – 4:54
Holy cow! That’s a big equation!
David Gonzalez – 4:57
I told you, I told you weren’t gonna like it.
Travis Farey – 5:00
Yeah. I’m not gonna lie, you definitely gave me some PTSD from my algebra days. But, I think what we’re really looking for here is what is the cost of the actual return to the company?
David Gonzalez – 5:12
Right, right. The layman’s term sure. So the cost of a return is the sum of the logistics costs and all future CLV if that customer churns due to the returns experience. Easier, right?
Travis Farey – 5:26
Well, it seems simple enough. But something key to point out in there is that it’s not just the logistical costs but it’s also the future profits that are lost from churn that need to be considered.
David Gonzalez – 5:38
Exactly. And I know I just gave you PTSD, but the metric to track is the cohort of shoppers that had a returns experience and churned compared to the average churn rate of the company without a returns experience. So, this delta combined with all logistics and all of your customer acquisition costs is the true cost per return.
So it sounds super complicated, but the idea is this: returns, no matter how you slice it, negatively impact CLV. The question is, to what degree and what can you do about it?
Travis Farey – 6:12
And that’s such an important question. But to really understand that, retailers should focus on segments and employ the RFM method: recency, frequency, and monetization. 
So recency refers to the last time a customer made a purchase. Customers who have made a purchase recently are more likely to make a repeat purchase than a customer who hasn’t made a purchase in a long time
Then you have frequency. And that refers to how many times the customer has made a purchase within a given time frame. So customers who make purchases often are more likely to continue to come back than a customer who rarely makes purchases.
And lastly, you have the monetary value and that refers to the amount of money a customer has spent within that same timeframe. So customers who make larger purchases are more likely to return than customers who spend less.
But now that we’ve determined what CLV is defined as and the importance of segmentation with the RFM method, how does our calculation change now?
David Gonzalez – 7:21
So CLV is traditionally calculated by multiplying the customer value by the average customer life span. In this equation, customer value is calculated as the average purchase value multiplied by the average number of purchases.
But now to get a true sense of the impact returns has on CLV, you’ll want to include the cost of returns into this equation to get the most accurate sense of health for your business.
Travis Farey – 7:49
So the current definition of CLV isn’t necessarily wrong. It’s just incomplete. And in the future, we need to account for returns in that equation.
David Gonzalez – 7:59
Travis Farey – 8:00
So now, our listeners maybe asking, “since we know how important CLV can be, what can we do to get shoppers coming back to purchase a second time? Should we offer discounts or coupon codes to get them to make a second purchase?” And the answer to that isn’t so straightforward.
David Gonzalez – 8:18
Yeah, it’s such a tricky question because weirdly enough, the most common time for a repurchase is actually within a day of the original purchase. So for all of the marketers out there who think with this way, the second the transaction happens, the clock to reengage starts ticking.
Even if they don’t buy right away, you want to reengage quickly. So the question becomes, is it profitable to offer a discount to someone who just purchased something?
Travis Farey – 8:47
And that’s such an interesting question. So, I read a study by OptiMove where they had analyzed the likelihood of a new customer making an additional order based on claiming a discount on their first order.
And the results showed that the likelihood of a newly acquired customer making another order and developing brand loyalty is significantly higher when the discount that they claimed on their first order was between 5-20%. That same research shows that there’s little to no difference between offering a 10 or 20% discount on both the customers likelihood to purchase again and their average future value.
David Gonzalez – 9:29
Right? And retailers in many verticals can offer 10 -20% discounts and still retain a pretty reasonable margin on that purchase. So offering high discounts may increase the number of orders you generate but it’ll typically lower the average order value. Intuitively, it also tends to reduce customer lifetime value.
However offering a medium size discount can increase the average future value of a customer by 20-25% compared to offering high or no discounts. So the average future value of customers who received no discount and those who received a high discount is nearly identical. So, are discounts even necessary or desirable?
Probably not in this case.
Travis Farey – 10:16
Right, right. So if discounts is the approach that you would like to take, you just need to keep in mind that offering medium sized discounts are probably your best bet.
But instead of discounts, I think a great question to answer would be how might returns data increase your customer lifetime value?
David Gonzalez – 10:35
I love this question. So increasing CLV with returns data is like a cheat code for ecommerce retailers. There’s just so much good information in returns data. For whatever reason, people kind of avoid collecting this information because they don’t wanna hear what customers don’t like, which is a huge missed opportunity.
It’s like that episode of South Park where Cartman pays someone to tell him only the good things that people say about him online. If there’s anything you take away from this podcast retailers, do not be like Cartman.
Travis Farey – 11:06
Wait, wait, pause. One second. Did you just compare our listeners to Eric Cartman?
David Gonzalez – 11:12
I get it like I’m kidding. But, here’s a small example of what I mean: Looking at something as simple as return reasons can give you hints on whether a segment of shoppers will buy again. For instance, someone chooses “too big or too small”, they genuinely are looking for a placement. And it also implies future purchase intent.
But if someone selects “didn’t match description” or “quality issues”, there’s a 66% chance they don’t buy from you again. So if you’re a marketer and you know, that, where do you spend your ad dollars or if you’re a merchandiser, UX lead, and you know, poor quality drastically reduces repurchase rate, now you know where you can focus.
Travis Farey – 11:55
That’s a great call out. The fact is that we may never be able to perfectly define the true value of a customer, but by understanding where the value is coming from in the customer journey or perhaps more importantly where it’s not coming from, retailers can make informed decisions in their marketing processes.
David Gonzalez – 12:15
Exactly. Yup.
Travis Farey – 12:16
And to take it a step further through returns data analysis, we can find where to retain value in the customer journey and we can also identify points of natural activity by analyzing the customer journey to fuel retention marketing.
David Gonzalez – 12:31
Spot on, yep. So again, no matter how you slice it, every return, negatively impacts CLV. The question is:
      • What can retailers do to lessen the blow and keep the shopper buying more even if their expectations weren’t met?
      • Where should retailers focus to save that relationship with the customer?
      • And how can they promote future purchases even after a shopper is left with an item that didn’t meet their expectations?
Without returns data, you’re just guessing.
Travis Farey – 12:59
Wow. Yeah. So we’ve gone through a lot of information here. So let’s break it down. Ultimately, why should retailers care about CLV and retaining their customers?
David Gonzalez – 13:11
Right? Retailers know, CLV is the holy grail metric. To take it a step further, it can also be the best proxy of health for your business. Once retailers can accurately calculate CLV per customer, they can then calculate what we call “enterprise lifetime value” AKA customer lifetime value times number of customers. Once retailers can accurately measure their enterprise lifetime value, they will understand the potential for their store.
Travis Farey – 13:39
Well said. In conclusion, customer lifetime value is a very important factor to look at when determining whether you want to focus on acquiring new customers or retaining your current customers or whichever side you choose. The customer lifetime value is always going to be an important piece of data to keep track of.
Well, that’s all we have for today folks. I want to give a special thanks to David for joining me on today’s episode, and we’ll see you guys on the next one.