Why cohort-based LTV is worth it
The classic shortcut LTV ~ (ARPA * gross margin) / churn can mislead because it assumes constant churn, ignores expansion, and can explode when churn is small. A cohort model makes assumptions explicit and is easier to scenario test.
A simple cohort model
- Start with ARPA and gross margin to compute monthly gross profit per account.
- Apply a monthly retention factor (1 - churn) to model survival.
- Apply monthly expansion to surviving accounts to model upgrades/seat growth.
- Optionally discount future cash flows to compute discounted LTV.
Choosing assumptions
- Logo churn: start with trailing monthly churn by plan/segment if possible.
- Expansion: use observed net retention patterns (expansion often varies heavily by segment).
- Discount rate: pick a consistent annual rate (e.g., cost of capital) if you want a present-value lens.
Common mistakes
- Mixing time units (annual churn plugged into monthly churn).
- Confusing logo churn with revenue churn (different denominators).
- Using blended averages when segments behave differently (plan, channel, cohort).