How to Calculate Customer Lifetime Value: Revenue, Gross Profit, and Input Data
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Category: CRM, LTV & Customer Management
Authors: Shusaku Yosa
Customer lifetime value, or LTV, measures value at the customer level. The number changes depending on whether value means revenue or profit and whether it is observed or forecast. Name the value measure, customer unit and time window before choosing a formula.
For example, “six-month observed gross-profit LTV for customers acquired in January” states what is being compared. Six months of data is not a confirmed lifetime total. This guide starts with a reproducible cohort calculation before moving to predictive assumptions.
Separate four meanings of LTV
Measure | Calculation concept | Use |
|---|---|---|
Observed revenue LTV | Cohort net revenue over a defined window ÷ original cohort size | Purchase behavior and order value |
Observed gross-profit LTV | Revenue less corresponding cost of sales ÷ original cohort size | A starting point for acquisition economics |
Forecast revenue LTV | Expected revenue from assumed purchases and retention | Revenue planning |
Forecast profit-based LTV | Expected value less explicitly defined delivery and maintenance costs | Investment and payback scenarios |
A common revenue-based approach, described in Shopify’s LTV guide, uses average order value, purchase frequency and relationship duration. Keep the time units consistent: monthly frequency cannot be multiplied directly by a duration expressed in years. For an initial operational report, a fixed cohort and observation window are usually easier to audit.
Prepare the input data
Field | Purpose | Check |
|---|---|---|
Customer ID | Join transactions belonging to the same customer | Merged accounts; company versus individual contact |
First purchase date | Define the acquisition cohort | Do not substitute inquiry date |
Order ID and date | Count orders and assign periods | Order lines are not separate orders |
Revenue after discounts and refunds | Reflect actual economic value | Tax, shipping and currency treatment |
Corresponding cost of sales | Calculate gross profit | Product and service-delivery scope |
Retention and acquisition costs | Support additional analysis | State whether already deducted from LTV |
Document cancellation, test-order and refund handling. Where possible, use costs corresponding to the original transaction rather than applying today’s margin to every historical sale. Keep estimated costs identifiable instead of silently treating them as observations.
Calculate a fixed-cohort example
All figures are fictional and use Japanese yen. A January cohort contains 100 first-time customers. Over the first six months after each customer’s initial purchase, the cohort places 250 orders, generates ¥3,000,000 in net revenue and incurs ¥1,800,000 in corresponding cost of sales.
Revenue LTV is ¥3,000,000 ÷ 100 = ¥30,000. Gross-profit LTV is (¥3,000,000 − ¥1,800,000) ÷ 100 = ¥12,000. The 250 ÷ 100 = 2.5 orders per customer refers to this six-month window. Customers who do not buy again remain in the original denominator.
Acquisition cohort | Original customers | Six-month net revenue | Six-month gross profit | Revenue LTV | Gross-profit LTV |
|---|---|---|---|---|---|
January | 100 | ¥3,000,000 | ¥1,200,000 | ¥30,000 | ¥12,000 |
February | 80 | ¥2,640,000 | ¥924,000 | ¥33,000 | ¥11,550 |
The February cohort has higher revenue LTV but lower gross-profit LTV. Discounts, product mix and delivery costs can reverse the conclusion suggested by revenue alone. Mark newer cohorts as immature when they have not completed the same six-month window; do not compare them directly with fully observed cohorts.
Use the right churn denominator
For a basic contractual-customer churn rate, define the population as paying customers active at the beginning of the month. If 10 of 200 starting accounts churn, the rate is 10 ÷ 200 = 5%. Adding 30 new accounts and ending with 220 does not change the denominator to 220.
Specify separate rules for customers who join and leave within the month, pauses, reactivations and payment failures. A starting-cohort retention table and a customer movement table serve different purposes. In noncontractual commerce, a customer who has not purchased recently has not necessarily ended the relationship.
Compare LTV with CAC consistently
If the January cohort required ¥800,000 of acquisition spending, CAC is ¥8,000. The difference from observed gross-profit LTV is ¥4,000 per customer, but that amount may still need to cover retention work, shared overhead and other excluded costs. It is not automatically net profit. If your chosen LTV definition already subtracts acquisition spending, do not subtract CAC again.
A universal LTV-to-CAC ratio cannot replace these checks. Observation horizon, margin, cash payback and forecast reliability determine what a ratio means. Accumulate comparable six- or twelve-month observations before extrapolating a short customer history into many years of value.
Make the calculation repeatable
- Save the extraction date and source systems.
- Resolve customer and order identities, refunds and currency treatment.
- Aggregate revenue and gross profit over equal customer-age windows.
- Explain changes in cost, product mix and acquisition source.
- Record the retention or acquisition action and the next review date.
Once the observed measure is stable, choose a predictive model appropriate to the business. A reliable definition comes before a sophisticated lifetime formula.
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