LTV Calculator for Annual Data

http://www.forentrepreneurs.com/ by David Skok, General Partner at Matrix Partners

Please refer to this blog post for details: http://www.forentrepreneurs.com/ltv/

Input cells where you enter your own data are formated with this color:

Formulae used:

𝐿𝑇�=𝐴𝑅𝑃𝐴 𝑥 𝐺𝑟𝑜𝑠𝑠 𝑀𝑎𝑟𝑔𝑖𝑛% 𝑥 ( 1/((1−�)) + (𝐺 𝑥 �)/

〖 (1−�) 〗 ^2 )
�= (1−𝐶ℎ𝑢𝑟𝑛) 𝑥 (1−𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑅𝑎𝑡𝑒)

Known Customer Churn Rate and Growth rate of Remaining Customers

ARPA x Gross Margin % $1 Annually
Churn (Customer Churn Rate) 10% Annually
G (Growth Rate for remaining customers) 22.22% Annually <-- If you don't know this, see Note to
Results in a Dollar Retention Rate of: 110.00% Annually

Discount Rate 0% 10% 15% 20%

K 0.90 0.81 0.765 0.72
LTV $ 30.00 $ 10.25 $ 7.33 $ 5.61

How LTV is affected by various Discount Rates

Copy of Data for Graphing
$35.00
0% 10% 15% 20%
LTV$30.00 $ 30.00 $ 10.25 $ 7.33 $ 5.61

$25.00

$20.00

$15.00

$10.00

$5.00

$-
0% 10% 15% 20% 25%
 $10.00

$5.00

$-
LTV Calculator 0%
for Monthly Data10% 15% 20% 25%

This is pretty much the same as the above calculation, except that to convert the Annual Discount
Rate to a Monthly Discount Rate using this formula: Monthly rate = (1 + annual rate)(1/12) – 1

ARPA x Gross Margin % $1 Monthly

Churn (Customer Churn Rate) 1% Monthly
G (Growth Rate for remaining customers) 2.00% Monthly
Results in a Dollar Retention Rate of: 100.98% Monthly

Annual Discount Rate 0% 10% 15% 20%

Monthly Discount Rate 0% 0.80% 1.17% 1.53%
K 0.99 0.98 0.98 0.97
LTV $ 298.00 $ 117.22 $ 88.25 $ 70.56
𝐿𝑇�=𝐴𝑅𝑃𝐴 𝑥 𝐺𝑟𝑜𝑠𝑠 𝑀𝑎𝑟𝑔𝑖𝑛% 𝑥 ( 1/((1−�)) + (𝐺 𝑥 �)/ 〖 (1−�) 〗 ^2 )
/

If you don't know this, see Note to the right
Note
This calculator assumes you know your Customer Churn Rate and the Grow
the remaining customers (that have not churned). However some readers m
Growth Rate for remaining customers, and instead may only know their Cus
and Dollar Retention Rates for the entire cohort, including churned custome
If that is your situation, the calculator below will give you Churn and G (Gro
for remaining customers)

25% Customer Retention Rate 90%

0.675 Churn (Customer Churn Rate) 10%
$ 4.50 DRR (Dollar Retention Rate) 110%

G (Growth Rate for remaining customers) 22.22%

Rates

25%
$ 4.50

20% 25%
 20% 25%

Annual Discount
te)(1/12) – 1

25%
1.88%
0.97
$ 58.77
Churn Rate and the Growth Rate for
However some readers my not know their
d may only know their Customer Retention
ncluding churned customers.
ive you Churn and G (Growth Rate
Real World Model for calculating Customer Lifetime Val
This model accompanies this blog post on ForEntrepreneurs: http://www.forentrepreneurs.com/lt

The purpose of the model on this tab is to take into consideration the fact that in the real world Ex
you may have collected enough cohort data to be able to understand how this works over time.

For example, you might know that most of your churn happens in the first three months, and then
know that your customers typically start to expand after around the 6th month, and by around the
slower pace.

The model allows you to input Customer Count and Revenue as a percentage of the starting value
your cohorts and how they have churned and expanded over time. Then it will give you a formula
periods, using your best guesses at the churn rate, and expansion rate for those remaining periods
further out in time you go, the less accuracy matters, as the values in those far off months/years a

Using the model:

Make a decision on what time period to use. For most companies, a time period of a year will be a
the model will work fine with any time period.

Enter the data for ARPA - the Average Revenue per Customer for the time period that you have sel
Enter the Gross Margin % which should take into consideration the Cost to Serve (both hosting cos
expand). For more on CORE, please refer to the blog post link at the top of this sheet.

Use the simple Discount Rate calculator to enter your desired Annual Discount Rate, and have that
(i.e. months, quarters, etc.).

From your own Cohort Analysis, enter the data on Customer Count, and Revenue for an average co
have meaningful data. (Also if you find that your churn and growth rates are now becoming more
use the Residual Value formula to pick up the remaining time periods.)

To use the Residual Value Calculator, simply enter the last value you have for "Discounted Revenue
And enter the values for churn, growth rate and gross margin to use in the residual model.
(The way that the model works is that the Residual Value will use the simple formula for LTV, which
Revenue as a % of starting value". Because that last value is already discounted, for the time up to
and reflect the fact that it is calculating values that are further out in time.)

The model will now tell you your Customer Lifetime Value (LTV).
ARPA $ 1,250.00 Average Revenue per Account, for the selected ti
Gross Margin % 80%
Avg Gross Profit per Account $ 1,000.00 This is a calculated value, for the selected time pe

Annual Discount Rate 10%

No of time periods in a year 12 Enter 1, if you are using annual data, 4 if your dat
Discount Rate for time period 0.80% This is a calculated value, converting the annual r

Residual Value Calculator

Customer Churn Rate 1% for the residual time period where you don't hav
Revenue Growth Per Remaining Customer 2% per period. This is only for the residual time perio

Time Period 0 1 2
Discount to apply to this period 0 0.8% 1.6%
Customer Count 100% 99% 98%
Revenue as a % of starting value 100% 90% 87%
Discounted Revenue as % of starting value 100% 89.29% 85.63%

Discounted Revenue received 2310% as a % of the starting value, which was set to 100
Discounted Gross Value of all revenue rcvd $ 28,874.07 the above number x ARPA
Discounted Gross Margin received $ 23,099.25 the above number x Gross Margin %

Residual Value Calculation

Discounted Value for the last Period 105.79% Use the last value you entered in Row 67 "Discou
Residual Value LTV Calculation
K (see formula below) 0.98
Discounted Residual Value $ 124,006.45

LTV (Customer Lifetime Value) $ 147,105.70

Formulae used in the Residual Value Calculation:

𝐿𝑇�=𝐴𝑅𝑃𝐴 𝑥 𝐺𝑟𝑜𝑠𝑠 𝑀𝑎𝑟𝑔𝑖𝑛% 𝑥 ( 1/((1−�)) + (𝐺 𝑥 �)/

〖 (1−�) 〗 ^2 )
�= (1−𝐶ℎ𝑢𝑟𝑛) 𝑥 (1−𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑅𝑎𝑡𝑒)
mer Lifetime Value (LTV)
ww.forentrepreneurs.com/ltv/

fact that in the real world Expansion revenue and Churn rates may vary over time, and
how this works over time.

first three months, and then it tapers off to a much slower rate of churn. Or you may
th month, and by around the 24th month, their expansion rate drops off to a much

centage of the starting values for as many time periods as you know, based on observing
en it will give you a formula to calculate the residual value for the remaining time
for those remaining periods. Because of discounted cash flows, you will find that the
those far off months/years are more highly discounted.

me period of a year will be accurate enough. However if you want to get more detailed,

time period that you have selected.

st to Serve (both hosting costs and support costs), and CORE (the cost to retain and
op of this sheet.

Discount Rate, and have that converted to the right discount rate for your time period

nd Revenue for an average cohort below. Fill in the data for as many time periods as you
es are now becoming more predictable and formulaic, you can stop entering data and
)

ave for "Discounted Revenue as a % of starting value".

n the residual model.
simple formula for LTV, which is shown below, starting with the last value for "Discounted
iscounted, for the time up to the Residual time period, the simple formula will work fine,
time.)
e per Account, for the selected time period (months, years, quarters, etc.)

ed value, for the selected time period

re using annual data, 4 if your data is quarterly, 12 if you are using monthly data, etc.
ed value, converting the annual rate into, for our example, a monthly rate.

time period where you don't have data

is only for the residual time period where you don't have data

3 4 5 6 7 8 9
2.4% 3.1% 3.9% 4.7% 5.4% 6.2% 6.9%
97% 96% 95% 94% 93% 92% 91%
86% 86% 87% 89% 91% 94% 97%
83.98% 83.31% 83.61% 84.86% 86.08% 88.21% 90.31%

rting value, which was set to 100%

ber x Gross Margin %

ue you entered in Row 67 "Discounted Value as % of starting value"

, and

may
h

erving

the

tailed,

nd

riod

as you
and

ounted
rk fine,
 10 11 12 13 14 15 16
7.6% 8.4% 9.1% 9.8% 10.5% 11.2% 11.9%
91% 90% 89% 88% 87% 86% 85%
100% 103% 106% 99% 102% 105% 105%
92.36% 94.38% 96.36% 89.29% 91.27% 93.21% 92.47%
 17 18 19 20 21 22 23
12.6% 13.3% 14.0% 14.7% 15.4% 16.0% 16.7%
84% 84% 83% 82% 81% 80% 80%
107% 109% 110% 113% 116% 119% 123%
93.49% 94.48% 94.59% 96.40% 98.18% 99.92% 102.46%
 24 25 26 27 28 29 30
17.4% 18.0% 18.7% 19.3% 19.9% 20.6% 21.2%
79% optionally fill in more data from your cohort analysis here if you have it
128%
105.79%
 31 32 33 34 35 36 37
21.8% 22.4% 23.1% 23.7% 24.3% 24.9% 25.5%
e if you have it
 38 39 40 41 42 43 44
26.1% 26.6% 27.2% 27.8% 28.4% 28.9% 29.5%
 45 46 47 48
30.1% 30.6% 31.2% 31.7%
Graphs

Discount Rate Lookup Table

Discount Rate 0 1 2 3 4
10% 100% 90% 81% 73% 66%
15% 100% 85% 72% 61% 52%

Simple Churn

Annual Churn Rate 10%

Year 0 Year 1 Year 2 Year 3 Year 4

% Dollars 100% 90% 81% 73% 66%
% Dollars - 10% discount 100% 81% 66% 53% 43%
% Dollars - 15% discount 100% 77% 59% 45% 34%

Effect of Discounting Future Cash Flows

10% Churn Example
100%
No Discount
90%
10% Discount
80%
15% Discount
70%

60%

50%

40%

30%

20%

10%
 30%

20%

10%

0%
a r 0 ar 1 ar 2 ar 3 ar 4 ar 5 ar 6 ar 7 ar 8 ar 9 r 10 r 11 r 12 r 13 r 14 r 15 r 16 r 17 r 18 r 19 r 20 r 21 r 22 r 23 r 24
Ye Ye Ye Ye Ye Ye Ye Ye Ye Ye Yea Yea Yea Yea Yea Yea Yea Yea Yea Yea Yea Yea Yea Yea Yea

Negative Churn Scenario

Annual Customer Churn 10%

Annual Expansion Rate 22.22% for remaining customers
Dollar Retention Rate 110.00%

Year 0 1 2 3 4
Customer count 100% 90% 81% 73% 66%
Dollars paid by remaining custs 100% 122% 144% 167% 189%

Year 0 Year 1 Year 2 Year 3 Year 4

% Dollars 100% 110% 117% 121% 124%
% Dollars - 10% discount 100% 99% 95% 89% 81%
% Dollars - 15% discount 100% 93% 85% 75% 65%

Effect of Discounting Future Cash Flows

10% Negative Churn Example
140% No Discount

10% Discount

120%
15% Discount

100%

80%
 100%

80%

60%

40%

20%

0%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

LTV Calculator for Annual Data

Formulae used:
𝐿𝑇�=𝐴𝑅𝑃𝐴 𝑥 𝐺𝑟𝑜𝑠𝑠 𝑀𝑎𝑟𝑔𝑖𝑛% 𝑥 1/((1−�)) + (𝐺 𝑥 �)/ 〖 (1−�) 〗 ^2

�= (1−𝐶ℎ𝑢𝑟𝑛) 𝑥 (1−𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑅𝑎𝑡𝑒)

ARPA x Gross Margin % $1

Churn (Customer Churn Rate) 10%
G (Growth Rate for remaining customers) 22.22%
Results in a Dollar Retention Rate of: 110.00%

Discount Rate 0 10% 15% 20% 25%

K 0.9 0.81 0.765 0.72 0.675
LTV $ 30.00 $ 10.25 $ 7.33 $ 5.61 $ 4.50
 5 6 7 8 9 10 11
59% 53% 48% 43% 39% 35% 31%
44% 38% 32% 27% 23% 20% 17%

Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11

59% 53% 48% 43% 39% 35% 31%
35% 28% 23% 19% 15% 12% 10%
26% 20% 15% 12% 9% 7% 5%

unt

ount

ount
 r 21 r 22 r 23 r 24
ea Yea Yea Yea

5 6 7 8 9 10 11
59% 53% 48% 43% 39% 35% 31%
211% 233% 256% 278% 300% 322% 344%

Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11

125% 124% 122% 120% 116% 112% 108%
74% 66% 58% 51% 45% 39% 34%
55% 47% 39% 33% 27% 22% 18%

scount

Discount

Discount
22 23 24 25
 12 13 14 15 16 17 18
28% 25% 23% 21% 19% 17% 15%
14% 12% 10% 9% 7% 6% 5%

Year 12 Year 13 Year 14 Year 15 Year 16 Year 17 Year 18

28% 25% 23% 21% 19% 17% 15%
8% 6% 5% 4% 3% 3% 2%
4% 3% 2% 2% 1% 1% 1%
 12 13 14 15 16 17 18
28% 25% 23% 21% 19% 17% 15%
367% 389% 411% 433% 456% 478% 500%

Year 12 Year 13 Year 14 Year 15 Year 16 Year 17 Year 18

104% 99% 94% 89% 84% 80% 75%
29% 25% 22% 18% 16% 13% 11%
15% 12% 10% 8% 6% 5% 4%
 19 20 21 22 23 24
14% 12% 11% 10% 9% 8%
5% 4% 3% 3% 2% 2%

Year 19 Year 20 Year 21 Year 22 Year 23 Year 24

14% 12% 11% 10% 9% 8%
2% 1% 1% 1% 1% 1%
1% 0% 0% 0% 0% 0%
 19 20 21 22 23 24
14% 12% 11% 10% 9% 8%
522% 544% 567% 589% 611% 633%

Year 19 Year 20 Year 21 Year 22 Year 23 Year 24

71% 66% 62% 58% 54% 51%
10% 8% 7% 6% 5% 4%
3% 3% 2% 2% 1% 1%
 What is your TRUE customer lifetime value? Blog post

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑢𝑠𝑡𝑜𝑚𝑒𝑟 𝐿𝑖𝑓𝑒𝑡𝑖𝑚𝑒=1/(𝐶ℎ𝑢𝑟𝑛 𝑅𝑎𝑡𝑒)

𝑇�=𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑢𝑠𝑡𝑜𝑚𝑒𝑟 𝐿𝑖𝑓𝑒𝑡𝑖𝑚𝑒 𝑥 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 𝑝𝑒𝑟 𝐴𝑐𝑐𝑜𝑢𝑛𝑡

=(𝐴𝑅𝑃𝐴 𝑥 𝐺𝑟𝑜𝑠𝑠 𝑀𝑎𝑟𝑔𝑖𝑛 %)/(𝐶ℎ𝑢𝑟𝑛 𝑅𝑎𝑡𝑒)

𝐶𝐶= �𝑒/(�𝑒+�𝑑) 𝑥 �𝑒 + �𝑑/(�𝑒+�𝑑) 𝑥 �𝑑 𝑥 (1−𝑇)

�𝑒= 𝑅𝑓+ 𝛽 ∗(𝑅𝑚 −𝑅𝑓)

𝐿𝑇�=𝐴𝑅𝑃𝐴 𝑥 𝐺𝑟𝑜𝑠𝑠 𝑀𝑎𝑟𝑔𝑖𝑛% 𝑥 1/((1−�)) + (𝐺 𝑥 �)/ 〖 (1−�) 〗 ^2

�= (1−𝐶ℎ𝑢𝑟𝑛) 𝑥 (1−𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑅𝑎𝑡𝑒)

𝐺𝑟𝑜𝑠𝑠 𝑀𝑎𝑟𝑔𝑖𝑛 % = 𝐴𝑅𝑃𝐴/(𝐶𝑂𝑆+𝐶𝑂𝑅𝐸)

𝑜𝑓 𝐴𝑐𝑐𝑜𝑢𝑛𝑡 𝑀𝑎𝑛𝑎𝑔𝑒𝑟)/(𝑁𝑜. 𝑜𝑓 𝑐𝑢𝑠𝑡𝑜𝑚𝑒𝑟𝑠 𝑡ℎ𝑒𝑦 𝑐𝑎𝑛 𝑠𝑒𝑟𝑣𝑒)+ (𝐶𝑜𝑠𝑡 𝑜𝑓 𝑎𝑛 𝐸𝑥𝑝𝑎𝑛𝑠𝑖𝑜𝑛 𝑆𝑎𝑙𝑒𝑠 𝑅𝑒𝑝)/(𝑁𝑜. 𝑜𝑓 𝑐𝑢𝑠𝑡𝑜𝑚𝑒𝑟𝑠 𝑡ℎ𝑒𝑦 𝑐𝑎𝑛 𝑠𝑒𝑟𝑣
𝑒𝑟 𝐴𝑐𝑐𝑜𝑢𝑛𝑡
(𝑁𝑜. 𝑜𝑓 𝑐𝑢𝑠𝑡𝑜𝑚𝑒𝑟𝑠 𝑡ℎ𝑒𝑦 𝑐𝑎𝑛 𝑠𝑒𝑟𝑣𝑒)