How do I calculate LTV when expansion is meaningful?
LTV = (ARPU × Gross Margin %) × (1 ÷ Monthly Churn %) ÷ 12. When expansion is 40%+ of revenue, add net retention multiplier: LTV = (ARPU × GM) × NRR% × (1 ÷ Churn) ÷ 12. The second formula is brutal honest—it accounts for the fact that your customer is growing (or shrinking) in value over time.
Standard LTV (no expansion):
LTV = Monthly ARPU × (Gross Margin %) ÷ Monthly Churn %
Example: $100 ARPU, 70% GM, 1% monthly churn. LTV = ($100 × 0.70) ÷ 0.01 = $7,000 per customer.
Compare CAC (what you spent): If CAC was $1,500, LTV:CAC ratio = 4.7x (healthy, target ≥3x).
LTV with expansion (net retention model):
LTV = (ARPU × GM) × (1 + (NRR% - 1)) × (1 ÷ Churn)
Same customer, now with 115% NRR (expansion). Year 2 they're worth $115 → Year 3 they're $132. LTV = ($100 × 0.70) × 1.15 ÷ 0.01 = $8,050 per customer. That extra $1,050 is expansion upside.
Why expansion blows up your LTV model:
- A customer cohort you acquire at $3K CAC, 80% GM, 1% monthly churn, 110% NRR is worth $8,400 by Year 3.
- Omit NRR, and you calculate $5,600. You've undervalued retention by 33%.
- This drives unit economics. At high NRR (120%+), you can afford higher CAC (up to $3,000–5,000) and still be profitable in 18 months.
Cohort LTV (the rigorous version):
Track a single cohort (e.g., customers acquired Jan 2024) month-by-month:
| Month | Retention | Avg Revenue | Cumulative |
|---|---|---|---|
| 1 | 100% | $100 | $100 |
| 3 | 98% | $110 | $318 |
| 6 | 95% | $125 | $675 |
| 12 | 90% | $140 | $1,480 |
| 24 | 80% | $160 | $2,640 |
Then: LTV = Sum of monthly revenue × GM% = $2,640 × 70% = $1,848 lifetime value. (This is backward-looking; use it to validate forward assumptions.)
Action: Calculate both ways. Use standard LTV for CAC payback decisions. Use expansion-adjusted LTV for board fundraising (it'll be 40–50% higher). Use cohort LTV to prove assumptions are real.
TAGS: ltv, customer-lifetime-value, nrr, expansion-revenue, unit-economics