Question of the day
2026-09-02
TMT
The textbook LTV formula divides gross profit by churn. What happens to that formula when a company's NRR exceeds 100%, and how do practitioners handle it?
Answer it out loud first — like you would in the room. Then check yourself:
Reveal the model answer
Model answer
The formula LTV = ARPA x gross margin / churn assumes a constant decay rate, giving a finite geometric-series value. If the existing base GROWS (NRR above 100%), the implied 'churn' input is negative and the formula produces an infinite or negative LTV - mathematically the perpetuity does not converge. Practitioners handle it by
- discounting cash flows so LTV converges as long as the discount rate exceeds net expansion
- using GROSS churn in the formula and treating expansion separately, or
- capping the modeled customer lifetime at some horizon like 7-10 years. The interview takeaway: quote LTV/CAC, but show you know the formula's assumptions break for best-in-class expanders.
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