The customer lifetime value formula: annual contribution per customer (revenue less cost of goods less cost to serve) times expected remaining life from the company's own churn by segment and tenure, discounted at a stated rate and reported as a range. Not revenue, not one churn rate, not an infinite horizon.
Customer lifetime value (LTV or CLV) is what a customer is expected to contribute over the rest of its relationship with the company. The simple formula is annual contribution per customer times expected remaining years; the sound one discounts each year back to today.
Two customers at similar revenue can differ fivefold in lifetime value because of what they cost to serve.
Expected life is an expectation over a distribution. A point estimate is read as a promise.
Annual contribution per customer, meaning revenue less cost of goods less cost to serve, multiplied by expected remaining life from the company's own retention by tenure, and discounted. LTV = Σ annual contribution ÷ (1 + r)^t for t = 1 to n, where r is the discount rate and n the expected remaining years. Undiscounted, LTV = annual contribution × n.
A customer contributes $14,000 a year. Customers of its tenure and segment stay a further six years on average. Undiscounted that is $14,000 × 6 = $84,000. Discounted at 8 percent, lifetime value is $14,000 × (1 − 1.08^−6) ÷ 0.08, about $65,000.
Built on revenue and an assumed lifetime. It produces a large, flattering number that nobody can check.
For the step-by-step calculation, see how to calculate LTV, and for setting it against acquisition cost, the LTV to CAC ratio.