Monthly Customer Lifetime Value Formula
Learn how monthly customer lifetime value is estimated from revenue, margin, service cost, churn, and acquisition cost.
This formula estimates the net gross profit expected from an average customer after the cost of acquiring that customer. It helps turn monthly operating data into a consistent customer-value estimate for planning and comparison.
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Customer Lifetime Value
Where:
First calculate monthly profit contribution after direct service costs. Then multiply it by the churn-based expected lifetime and subtract the one-time acquisition cost.
Variables Explained
| Variable | What It Means | Unit |
|---|---|---|
| CLV - Customer lifetime value | Estimated net gross profit from an average customer after acquisition cost. | currency |
| R - Monthly revenue per customer | Average recurring revenue generated by one active customer each month. | currency |
| GM - Gross margin | The percentage of revenue remaining after direct delivery costs, before customer-specific service costs. | percent |
| S - Monthly service cost | Average direct monthly cost of supporting, managing, or serving one customer. | currency |
| C - Monthly churn rate | Percentage of active customers expected to leave in a typical month. | percent |
| CAC - Customer acquisition cost | Average one-time sales and marketing cost to acquire one customer. | currency |
Step-by-Step Calculation
Convert gross margin to a decimal
Divide the gross margin percentage by 100 before applying it to monthly revenue.
grossMarginDecimal = grossMargin / 100
Calculate gross profit before service costs
This estimates the monthly gross profit remaining after the costs already represented by gross margin.
grossProfitBeforeService = monthlyRevenuePerCustomer * grossMarginDecimal
Calculate monthly customer profit
Subtract direct customer-specific service costs from monthly gross profit.
monthlyGrossProfit = grossProfitBeforeService - monthlyServiceCost
Estimate customer lifetime
A stable monthly churn rate is converted to a decimal and inverted to estimate average active months.
expectedLifetimeMonths = 1 / (monthlyChurnRate / 100)
Calculate lifetime profit before acquisition
Multiply monthly customer profit by the expected lifetime.
lifetimeGrossProfitBeforeAcquisition = monthlyGrossProfit * expectedLifetimeMonths
Deduct acquisition cost
Subtract the one-time cost to acquire the customer to estimate net customer lifetime value.
customerLifetimeValue = lifetimeGrossProfitBeforeAcquisition - customerAcquisitionCost
Worked example: subscription customer with 5% monthly churn
Convert gross margin
70 / 100
0.70
Gross profit before service costs
200 × 0.70
$140 per month
Monthly gross profit per customer
140 - 20
$120 per month
Expected customer lifetime
1 / (5 / 100)
20 months
Lifetime profit before acquisition cost
120 × 20
$2,400
Customer lifetime value
2,400 - 250
$2,150
Final Result
Estimated customer lifetime value: $2,150, based on an expected lifetime of 20 months.
Assumptions
- ✓Monthly churn remains constant throughout the average customer relationship.
- ✓Monthly revenue, gross margin, and direct service costs remain stable for the average customer.
- ✓Expected lifetime is estimated as one divided by monthly churn expressed as a decimal.
- ✓Customer acquisition cost is a one-time cost incurred at the start of the relationship.
- ✓Taxes, financing costs, and indirect overheads are excluded unless already included in the inputs.
Limitations
- !An overall average can conceal meaningful differences between customer segments, plans, cohorts, or contract terms.
- !The simple churn inversion does not model changing retention patterns, reactivations, or contract renewal behavior.
- !The estimate does not include revenue expansion, downgrades, refunds, payment failures, or price changes.
- !Future profit is not discounted, so the calculation is an operating estimate rather than a present-value model.
Common Mistakes to Avoid
Entering annual churn instead of monthly churn.
Using revenue as profit without applying gross margin.
Counting costs already included in gross margin again as monthly service cost.
Leaving out direct support, account-management, hosting, or delivery costs that vary by customer.
Comparing CLV after acquisition cost with a CLV metric that excludes acquisition cost.
Using one company-wide churn rate when customer segments have very different retention patterns.
Related Formulas
Frequently Asked Questions
What is the monthly customer lifetime value formula?
This calculator uses CLV = [(monthly revenue × gross margin) − monthly service cost] × expected lifetime − acquisition cost, where expected lifetime is 1 divided by monthly churn as a decimal.
How do you calculate customer lifetime from monthly churn?
Divide 1 by the monthly churn rate expressed as a decimal. For example, 5% monthly churn is 0.05, and 1 ÷ 0.05 equals an estimated 20 months.
Why is customer acquisition cost subtracted from CLV?
Subtracting acquisition cost produces an estimate of net gross profit after the cost of winning the customer. Some businesses report a separate pre-acquisition CLV instead, so metric definitions should be labeled clearly.
What is monthly gross profit per customer?
It is monthly revenue after the gross-margin adjustment, less direct monthly costs of servicing that customer.
Can customer lifetime value be negative?
Yes. The estimate can be negative when expected lifetime gross profit is lower than acquisition cost, or when monthly service costs exceed gross-profit contribution.
Does this formula include discounting?
No. It does not discount future profit to present value and assumes stable monthly inputs.
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