Customer Lifetime Value (LTV)

The standard formula is LTV = (ARPU × gross margin %) ÷ churn rate, where ARPU is average revenue per user per period and churn is the percentage of customers lost per period. The intuition: 1 ÷ churn gives the average customer lifetime (if you lose 25% of customers a year, the average customer stays 4 years), and you multiply that lifetime by the gross profit each customer generates per period. Two things make or break the number. First, use gross profit, not revenue — a customer paying $100/month at 20% margin is worth a fraction of one at 90% margin. Second, churn dominates: small changes in churn swing LTV wildly because it's in the denominator.

Plenty of pitches quote 'LTV' on a revenue basis, which inflates the number and makes the LTV/CAC ratio look better than it is. Investors insist on a gross-margin-based LTV because only the gross profit is actually available to cover acquisition cost and overhead. Churn matters even more because of the 1/churn relationship: dropping annual churn from 20% to 10% doubles average lifetime from 5 to 10 years and therefore doubles LTV. This is why net revenue retention and churn are the metrics VCs grill hardest — they're the single biggest lever on lifetime value, and a small reported-churn error massively distorts LTV.

Because LTV sums profit far into the future, two refinements separate rigorous from sloppy estimates. First, future cash should be discounted to present value — a dollar of gross profit five years out is worth less than a dollar today — though many startups skip this and overstate LTV. Second, the simple formula assumes constant churn and ARPU forever; in reality early cohorts churn faster and the very long tail rarely materializes, so capping the modeled lifetime (e.g. 3-5 years) is more honest than assuming a customer stays a decade. Smart investors stress-test LTV by asking what it looks like under higher churn and on a capped, discounted basis.