How this calculator works
A subscription business earns from a customer month after month, so the value of that customer is the monthly gross profit they produce multiplied by the expected number of months they stay. With a constant monthly churn rate, the expected lifetime is one divided by the churn rate: at 2.5% monthly churn a customer stays 40 months on average. Revenue per account comes from monthly recurring revenue divided by customers, and expansion revenue is added before applying the gross margin, because margin is what actually pays for acquisition and operations. The total multiplies the per-customer value by the number of customers. The reverse mode finds the ARPA needed to reach a target lifetime value at the current churn and margin.
Formula
ARPA = MRR / customers. Lifetime months = 1 / monthly churn rate. Monthly margin per customer = (ARPA + expansion) x gross margin. LTV = monthly margin / monthly churn rate. Total LTV = LTV x customers. Required ARPA = target LTV x churn / gross margin - expansion.
Worked example
With 100 customers and $50,000 of monthly recurring revenue, ARPA is $500. At an 80% gross margin and no expansion, each customer produces $400 of gross margin a month. At 2.5% monthly churn the expected lifetime is 40 months, so LTV is $400 x 40 = $16,000 and the customer base is worth $1,600,000. Adding $50 a month of expansion raises monthly margin to $440 and LTV to $17,600. To reach $20,000 at the same churn and margin, ARPA must be $20,000 x 0.025 / 0.8 = $625.
Advertisement
Frequently asked questions
Should I use gross revenue or gross margin?
Use gross margin. Serving a customer costs money for hosting, support and payment processing, so only the margin is available to cover sales and marketing. A lifetime value built on revenue overstates what the customer is worth.
Is a constant churn rate realistic?
It is a simplification. In practice churn is high in the first months and lower for long-tenured customers. The formula gives a useful average, but segment the calculation by cohort or plan when churn varies a lot between them.
What counts as expansion revenue?
Expansion is added seats, upgrades or usage above the plan price from existing customers, divided by the number of customers. It belongs in lifetime value because it raises the margin a retained customer produces. Contraction and downgrades should be entered as a negative amount.