Accounting Customer Lifetime Value Formula
Learn how discounted gross customer lifetime value and net customer lifetime value are calculated.
This calculation estimates the present value of gross profit expected from one customer over a selected number of years. It applies retention to future years, discounts future profit to today, and subtracts customer acquisition cost to estimate net customer lifetime value.
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Net Customer Lifetime Value
Where:
Calculate the present value of expected future gross profit, then deduct the one-time cost of acquiring the customer.
Variables Explained
| Variable | What It Means | Unit |
|---|---|---|
| R - Annual revenue per customer | Average revenue generated by one active customer in a year. | currency |
| M - Gross margin | Percentage of revenue remaining after direct delivery costs. | percent |
| q - Annual retention rate | Expected percentage of customers who remain active each year. | percent |
| d - Annual discount rate | Rate used to reduce future gross profit to present value. | percent |
| n - Analysis period | Number of future years included in the estimate. | years |
| CAC - Customer acquisition cost | Average one-time cost to acquire one customer. | currency |
Step-by-Step Calculation
Calculate annual gross profit
Revenue is converted to annual gross profit using the gross margin.
annualGrossProfitPerCustomer = annualRevenuePerCustomer * (grossMargin / 100)
Convert percentage inputs
Retention and discount percentages are converted to decimals for the formula.
retentionRateDecimal = annualRetentionRate / 100; discountRateDecimal = discountRate / 100
Find the discounted retention factor
This factor combines the likelihood of retention with the present-value discounting of future profit.
discountedRetentionFactor = retentionRateDecimal / (1 + discountRateDecimal)
Calculate discounted gross lifetime value
This finite geometric-series formula adds expected discounted gross profit across the selected period.
grossCustomerLifetimeValue = annualGrossProfitPerCustomer * discountedRetentionFactor * (1 - pow(discountedRetentionFactor, analysisYears)) / (1 - discountedRetentionFactor)
Deduct acquisition cost
Customer acquisition cost is deducted once to produce net customer lifetime value.
netCustomerLifetimeValue = grossCustomerLifetimeValue - customerAcquisitionCost
Worked example: five-year subscription customer
Annual gross profit
$1,200 × 0.60
$720
Discounted retention factor
0.85 / 1.10
0.7727
Discounted gross lifetime value
$720 × 0.7727 × (1 - pow(0.7727, 5)) / (1 - 0.7727)
$1,774.18
Net customer lifetime value
$1,774.18 − $300
$1,474.18
Final Result
Estimated net customer lifetime value: about $1,474. Estimated discounted gross lifetime value: about $1,774.
Assumptions
- ✓Annual revenue per active customer stays constant throughout the analysis period.
- ✓Gross margin remains constant and represents revenue after direct delivery costs.
- ✓Retention is applied annually, beginning with the first future year.
- ✓Customer acquisition cost is a one-time upfront cost.
- ✓Future gross profit is discounted using the annual rate entered.
Limitations
- !Actual revenue, pricing, usage, margins, and retention can change over time.
- !The calculation does not separately model refunds, expansion revenue, contraction, bad debt, fixed overhead, taxes, or financing costs.
- !A single average may conceal substantial differences between customer segments or acquisition channels.
- !The result is an estimate for planning and analysis, not financial or accounting advice.
Common Mistakes to Avoid
Using revenue as gross profit instead of applying the gross margin.
Entering churn rate in the retention field; retention is the percentage that stays active.
Using monthly retention with annual revenue and annual discounting.
Deducting customer acquisition cost from every year rather than once.
Treating a longer analysis period as a prediction that every customer will remain active.
Related Formulas
Frequently Asked Questions
What is the formula for discounted customer lifetime value?
This calculator multiplies annual gross profit by a retention-and-discount factor, sums the selected years using a finite geometric series, and then subtracts customer acquisition cost.
Why is retention divided by one plus the discount rate?
Retention estimates the chance of future activity, while the discount rate reduces the present value of future profit. The factor combines both effects.
Why does the formula use gross margin?
Gross margin adjusts revenue for direct costs of serving the customer, producing a gross-profit-based estimate rather than a revenue-only measure.
What happens when the discount rate increases?
Future gross profit receives less present value, so discounted gross CLV and net CLV generally decrease.
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