Customer Lifetime Value (Contribution LTV)
Definition, formula, a worked example, and the mistakes that make it wrong. For DTC brands.
What is customer lifetime value (contribution ltv)?
Formula
Cumulative contribution of the cohort through month N ÷ customers first acquired in the cohort
What each part means
- Cohort
- Customers grouped by the month of their first order and the channel that acquired them. Pick one channel rule, such as first touch, and keep it steady.
- Contribution
- Net sales plus shipping charged, minus cost of goods, fulfillment, and payment fees, for every order the cohort places. Rent, salaries, and software stay out.
- Month N
- The age you measure at. Month 0 is the month of the first order. Only compare cohorts that have all reached the same month.
- Customers first acquired
- The cohort size at the start. Keep it fixed. Dividing by customers still active makes LTV rise as customers leave.
- Contribution after CAC
- LTV minus the CAC for the same cohort and channel. This is the number to use for a spend decision, with the payback month shown beside it.
Worked example
A channel acquires 400 new customers in March for $16,000 of spend, so CAC is $40. Through month 6, those customers generate $20,000 of contribution. Six-month contribution LTV is $20,000 ÷ 400 = $50 per customer, and contribution after CAC is $50 - $40 = $10 per customer.
Where the numbers come from
- Shopify orders and refunds, grouped by customer and first order date
- Shopify customer cohort analysis report, as a check on customer counts
- Visit or first-touch data (Shopify customerJourneySummary) for the acquisition channel
- A dated cost table, 3PL invoices, and payment processor fees for contribution
- Ad platform spend by channel and month for CAC
Mistakes that make it wrong
- Using revenue LTV for spend decisions
- Revenue LTV can rank channels in a different order from contribution LTV. A channel with higher sales per customer can still leave less after costs and CAC.
- Comparing cohorts of different ages
- A three-month-old cohort cannot be compared with a twelve-month-old one. Cut every cohort off at the same month.
- Blending forecasts into observed value
- Keep projected spend per customer in its own labeled column. Do not mix it into what customers actually did.
- Ignoring late refunds
- A refund can land months after the order. Assign it to the original cohort and restate, and expect recent months to move.
What good looks like
We do not publish a target LTV or LTV to CAC ratio. A 3:1 rule of thumb does not tell you how long your cash is out. Track contribution after CAC by channel at fixed ages, note the month each channel pays back, and set targets from your own cohorts.
Common questions
What is the difference between revenue LTV and contribution LTV?
Revenue LTV adds up what customers spent. Contribution LTV subtracts cost of goods, fulfillment, and payment fees first, so it shows what customers are actually worth to the business.
How many months should LTV cover?
Pick a fixed age, such as 6 or 12 months after the first order, and only compare cohorts that have reached it. Our sample dictionary uses 12 months.
Does attributed LTV show what the ads caused?
No. It shows what customers credited to a channel went on to be worth. A lift test is needed to estimate how many of them the spend actually caused.
How do subscribers affect LTV by channel?
A channel that brings in more subscribers can have a different curve after month 6. Split subscribers from one-time buyers before you compare channels.
Why should cohort size stay fixed?
If you divide by customers who are still active, LTV goes up as customers leave. Divide by the number first acquired.
Want customer lifetime value (contribution ltv) from your own data?
We build the reports that calculate it the same way every month, from the systems you already use.