Accounting Customer Lifetime Value Formula
Learn how to estimate the net lifetime value of one customer from monthly revenue, customer-specific costs, churn, and acquisition cost.
This per-unit customer lifetime value formula estimates the contribution expected from one typical customer over an average relationship. It helps separate monthly unit economics from the one-time cost of acquiring that customer.
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Net Customer Lifetime Value
Where:
First, find the monthly contribution left after direct and servicing costs. Multiply it by the estimated customer lifetime based on churn, then subtract the cost to acquire the customer.
Variables Explained
| Variable | What It Means | Unit |
|---|---|---|
| averageMonthlyRevenue - Average monthly revenue per customer | Average revenue received from one customer in a typical month. | currency |
| monthlyCostOfGoods - Monthly direct cost per customer | Direct delivery or cost-of-goods cost attributable to one customer each month. | currency |
| monthlyServiceCost - Monthly servicing cost per customer | Recurring support, account management, fulfilment, or other customer-specific cost per month. | currency |
| monthlyChurnRate - Monthly customer churn rate | Percentage of comparable customers expected to stop purchasing in an average month. | percent |
| customerAcquisitionCost - Customer acquisition cost | Sales and marketing cost allocated to acquiring one customer. | currency |
Step-by-Step Calculation
Convert churn to a decimal
A percentage churn input must be converted to decimal form before it is used in the lifetime calculation.
monthlyChurnDecimal = monthlyChurnRate / 100
Estimate customer lifetime
The simplified model estimates average lifetime as the inverse of constant monthly churn.
expectedLifetimeMonths = 1 / monthlyChurnDecimal
Calculate monthly contribution
This is the amount remaining from monthly revenue after direct delivery and recurring servicing costs.
monthlyContribution = averageMonthlyRevenue - monthlyCostOfGoods - monthlyServiceCost
Calculate gross lifetime value
Gross customer lifetime value is estimated lifetime contribution before acquisition cost.
grossCustomerValue = monthlyContribution * expectedLifetimeMonths
Calculate net customer lifetime value
Subtracting acquisition cost gives the estimated net contribution from one customer.
netCustomerLifetimeValue = grossCustomerValue - customerAcquisitionCost
Example: subscription customer lifetime value
Convert churn
5 / 100
0.05
Estimate lifetime
1 / 0.05
20 months
Find monthly contribution
200 - 60 - 20
$120 per month
Calculate gross lifetime value
120 * 20
$2,400
Subtract acquisition cost
2400 - 300
$2,100
Final Result
Estimated net customer lifetime value: $2,100 per customer.
Assumptions
- ✓Monthly churn remains constant over the expected customer relationship.
- ✓Average monthly revenue, direct costs, and servicing costs do not change over time.
- ✓Direct and servicing costs are variable costs attributable to the individual customer.
- ✓Customer acquisition cost is incurred once and is allocated to the customer.
- ✓Future cash flows are not discounted for the time value of money.
Limitations
- !Real customer retention may vary by tenure, cohort, product, or season rather than staying constant.
- !Revenue can change through upgrades, downgrades, usage changes, refunds, or price changes.
- !Some overheads, taxes, and shared operating costs are not included unless they are entered as customer-specific costs.
- !The inverse-churn lifetime estimate is a simplified average, not a prediction for an individual customer.
- !Accounting treatment of costs and revenue may differ by organisation and reporting purpose.
Common Mistakes to Avoid
Entering annual churn instead of monthly churn.
Using gross revenue without deducting direct delivery costs.
Leaving out recurring support, fulfilment, or account-management costs that scale with customers.
Subtracting acquisition cost every month rather than once per acquired customer.
Treating gross lifetime value before acquisition cost as net lifetime value.
Using blended inputs from unlike customer segments when a segment-level estimate is needed.
Related Formulas
Frequently Asked Questions
What is the formula for net customer lifetime value?
In this calculator, net CLV equals monthly contribution multiplied by estimated lifetime in months, less customer acquisition cost. Monthly contribution is revenue less direct and servicing costs.
How is customer lifetime calculated from monthly churn?
The simplified estimate is 1 divided by monthly churn expressed as a decimal. For example, 5% monthly churn is 0.05, so estimated lifetime is 20 months.
What is the difference between gross and net customer lifetime value?
Gross customer lifetime value is lifetime contribution before acquisition cost. Net customer lifetime value deducts the acquisition cost assigned to that customer.
Can customer lifetime value be negative?
Yes. Net CLV is negative when estimated gross lifetime contribution is lower than acquisition cost, or when monthly contribution is negative.
Does the formula include discounted cash flow?
No. This is an undiscounted estimate. Discounting may be relevant when evaluating longer-term future cash flows.
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