The Loyalty Loop
Customer Lifetime Value
5-6 minute read
TLDR: Customer Lifetime Value (LTV) measures the total profit a customer generates over their entire relationship with your business, while Customer Acquisition Cost (CAC) is what you spend to acquire them. Most businesses focus on lowering acquisition costs while ignoring massive revenue losses from customer churn. Simple retention strategies like personalised communication and excellent customer support can dramatically increase LTV and profitability without additional marketing spend.
Have you ever poured water into a bucket, only to have it leak out of several holes at the bottom? Your first logical response to this would be to plug the holes, right?
9 out of 10 businesses make the mistake of simply adding more water to this bucket rather than addressing the water gushing out of the holes.
Happy Brew
We're going to imagine that you are a coffee company (we’re going to call them Happy Brew*) that delivers premium coffee once a month on a subscription model.
Let's calculate their CLV, their CAC and find out why they're losing $313,500 per year to retention leaks.
Customer Lifetime Value (CLV)
There are multiple times of income. One off purchases, Monthly Recurring Revenue (MRR) or Annual Recurring Revenue (ARR). Regardless of your income frequency, you want to understand the timeframe and value of your customer.
In order to calculate the CLV, you need to know two things:
  1. Customer margin (m): The revenue generated per customer minus the cost to deliver the product or service over one year
  1. Customer lifetime (T)

Lifetime Value (LTV) = m * T
Happy Brews annual customer margin per customer is $115 their customers subscribe on average for two years.
LTV = $115 * 2 = $230
Total profit= $230 per customer
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Customer acquisition cost (CAC)
As much as the ideal customer would be for free, most customers cost money to acquire and become a first time customer. CAC is the cost that you have spent to gain that customer. These costs could be broken down in:
  • Staff
  • Marketing ad spend
  • Referrals/partnerships
  • Affiliate
Let’s combine all of these under Marketing cost ($)
Happy Brew has a goal of adding 1000 customers per year and spends $50 000 on all of the above marketing efforts.
Customer Acquisition Cost = Marketing Cost ($) / Number of Customers
$50 000/1000 = $50
Acquisition cost per customer= $50
The cost of not retaining customers
Happy Brew has 5000 paying customers.
Each year they lose about 10% of their total customers (500) as they only stay for 1 year.
The cost to replace those customers is 500x $50 = $250 000
Not only that, but Happy Brew lost an additional $115 in profit for each of those customers 500x $115 = $57,550.
Happy brew has 10 new customers referred each year per 100 customers, so that’s an additional 50x $115 = $5750
Total loss of revenue = $313,300
How much should i be earning from customers?
A ratio between the long term value and acquisition cost (LTV/CAC) is a solid metric to understand if you have a healthy profit margin with the ability to cover overhead, marketing costs, and costs related to scaling.
A healthy ratio is considered to be at least 3. Happy brew has a 4.6 ratio (230/50), so they have good margins to work with.
When a product or service successfully addresses both functional and emotional needs, it significantly increases the likelihood of not just a sale, but also sustained customer loyalty.
Why Is This So Important?
The hardest part of growing a business is attracting customers and making the sale. Once the sale is complete however, few actions are taken to reward customers for continuing to be loyal customers. Anniversaries, birthdays, giveaways. All of these are options of ways to reward a customer and keep them for longer. McKinsey research suggests that 61% of customers expect and respond more favourably to personalised messaging rather than sending out generic email blasts.
"..companies that excel at personalization generate 40 percent more revenue from those activities than average players" ​Mckinsey & Company.
Customer support is also key in keeping customers for longer, where rather than seeing customers as a burden, you could shift mentality and think “wow! How great it is that our customers care so much that they want to talk to us?
What You Can Do Immediately
Look at your current metrics and see which ones you are most focused on.
  • Are you only concerned with vanity metrics like clicks and opens?
  • Are you maintaining a healthy retention ratio of your existing customers?
Use this time to determine a specific goal that you would like to achieve in the next 12 months. As illustrated above, focusing on maintaining and growing your initial customer base is a worthwhile endeavor that can significantly impact your bottom line.
Start by calculating your current LTV/CAC ratio, then identify one concrete action you can take this week to improve customer retention.
Join The Loyalty Loop
Customer loyalty isn't voodoo magic, it's a simple equation that can keep customers coming back time and time again. In The Loyalty Loop, we'll send you a monthly guide about how you can retain your customers longer, get them paying more, and actionable tips to improve loyalty.
1 Email. Once per month.
Want to calculate your CLV and CAC?
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*Happy brews is the fictional name given to a coffee company found whilst doing research. Their name has been censored for this article.