As eCommerce experts at Blend, we’ve seen many businesses make the same mistake when it comes to calculating their growth. And if you’re making the same mistake, don’t feel bad. This has been the normal way of doing things for years.
But in an ever-evolving world where technology is rising to power, things change. And the mistake of using an incomplete formula to calculate your growth will make measuring your success difficult to ascertain.
Now is the time for eCommerce leaders like you to start using a more comprehensive formula that takes into account Customer Lifetime Value.
The CLV Ecommerce Growth Formula
Customer Lifetime Value (CLV) is the amount of money a customer is expected to spend on your store over the course of their lifetime. And this metric is insanely valuable, so why is it so often overlooked?
The common growth formula has been widely accepted for years:
But it only takes three factors into account to calculate growth. This is simply not enough to understand the success of your business.
This is why we’ve created a formula that accounts for all factors when calculating the success of your eCommerce business:
Let’s break this down.
The Four Components of the CLV Formula
The First Component
The first component of the CLV Formula is Purchase Frequency, which is the number of times a customer purchases from your store over a given period. This is vital because it helps you understand how often your customers are buying from you — in turn, helping you make informed decisions about how to keep them coming back.
The Second Component
The second component of the formula is gross margin, which is the profit you make after accounting for the cost of goods sold. Gross margin is important because it helps you understand how much profit you make from each customer, helping you determine customer value.
The Third Component
The third component of the formula is Average Order Value, which is the average amount of money a customer spends per purchase. AOV gives you an understanding of each customer transaction, helping you, again, determine the value of that customer to your business.
The Fourth Component
The fourth and final is Customer Lifespan, the length of time a customer remains with your business. Understanding the long-term value of your customers will (let’s all say it together now) help you understand the value of your customers to your business.
Blend & the CLV Formula
Imagine you have an eCommerce store selling organic skincare products. Your average customer purchase frequency is 2 times a month, your average gross margin is 40%, your AOV is £50, and your customer lifespan is 2 years.
Using the formula given, each customer is worth approximately £480 to your business over the course of their 2-year lifespan. Our formula gives you a complete picture of your store’s growth, and this information is valuable to make informed decisions on growing your business.
At Blend, we want our clients to have all the knowledge in the palm of their hands so that making those decisions are as effortless as possible — and implementation is simple. If you want effortless decisions, contact the team at Blend today.