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:

= % ( 1/((1)) + ( )/
(1) ^2 )
= (1) (1 )
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 t
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 $ 10.25 $ 7.33 $ 5.61
$30.00

$25.00

$20.00

$15.00

$10.00

$5.00

$-
0% 10% 15% 20% 25%
 $15.00

$10.00

$5.00

$-
0%
LTV Calculator for Monthly Data 10% 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
= % ( 1/((1)) + ( )/ (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 Gro
the remaining customers (that have not churned). However some readers
Growth Rate for remaining customers, and instead may only know their C
and Dollar Retention Rates for the entire cohort, including churned custom
If that is your situation, the calculator below will give you Churn and G (G
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%

nnual Discount
)(1/12) 1

25%
1.88%
0.97
$ 58.77
 hurn Rate and the Growth Rate for
However some readers my not know their
may only know their Customer Retention
cluding churned customers.
ve 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
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
that your customers typically start to expand after around the 6th month, and by around the 24th

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

Using the model:

Make a decision on what time period to use. For most companies, a time period of a year will be a
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
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
months, quarters, etc.).

From your own Cohort Analysis, enter the data on Customer Count, and Revenue for an average co
meaningful data. (Also if you find that your churn and growth rates are now becoming more predi
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
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:

= % ( 1/((1)) + ( )/
(1) ^2 )
= (1) (1 )
mer Lifetime Value (LTV)
ww.forentrepreneurs.com/ltv/

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

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

entage of the starting values for as many time periods as you know, based on observing your
will give you a formula to calculate the residual value for the remaining time periods, using
aining periods. Because of discounted cash flows, you will find that the further out in time
/years are more highly discounted.

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

me period that you have selected.

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

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

d Revenue for an average cohort below. Fill in the data for as many time periods as you have
e now becoming more predictable and formulaic, you can stop entering data and use the

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

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

ed value, for the selected time period

e 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

s 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%

er x Gross Margin %

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

d you

know
ace.

ng your
using
time

d, the

pand).

(i.e.

ou have
he

ted
ne, and
 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%
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%
0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4
ear ear ear ear ear ear ear ear ear ear ar 1 ar 1 ar 1 ar 1 ar 1 ar 1 ar 1 ar 1 ar 1 ar 1 ar 2 ar 2 ar 2 ar 2 ar 2
Y Y Y Y Y Y Y Y Y Y Ye Ye Ye Ye Ye Ye Ye Ye Ye Ye Ye Ye Ye Ye Ye

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:
= % 1/((1)) + ( )/ (1) ^2

= (1) (1 )

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

unt
 21 22 23 24
ar ear ear ear
Y Y Y

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%

count

scount

scount
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

=1/( )

=( %)/( )

= /(+) + /(+) (1)

= + ( )

= % 1/((1)) + ( )/ (1) ^2

= (1) (1 )

% = /(+)

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