CLTV = (ARPA x gross margin %) ÷ churn rate
Every term in that formula is a decision, and each one can double the answer.
Decision 1: margin, not revenue
Dividing revenue by churn gives lifetime revenue, not lifetime value. At 75% gross margin, using revenue overstates by a third before anything else goes wrong.
Use gross margin, and use the same cost-of-revenue definition you use for gross margin, or the two numbers will disagree.
Decision 2: which churn
Revenue churn or logo churn, and gross or net.
Using net revenue churn is where CLTV becomes fiction. If expansion exceeds churn, net churn is negative and the formula divides by a negative number, producing an infinite or nonsensical lifetime. Teams then quietly substitute a "reasonable" figure, which means the output is an assumption wearing a formula.
Use gross revenue churn. Handle expansion separately rather than letting it break the denominator.
Decision 3: a horizon, not infinity
The formula assumes a customer churns at a constant rate forever, which is false in both directions: early churn is higher, and no customer lasts indefinitely.
Cap it. Five years is common and defensible. An uncapped CLTV at 8% annual churn implies a 12.5-year average life, which almost no B2B software business can evidence.
A worked example
ARPA $9,600 a year, gross margin 76%, gross annual revenue churn 9%.
Annual margin per customer = 9,600 x 0.76 = $7,296
Uncapped CLTV = 7,296 ÷ 0.09 = $81,067
Capped at 5 years = 7,296 x 4.1 (survival-weighted) ≈ $29,900
The uncapped figure is 2.7 times the capped one. Both come from the same inputs. Which you publish is a choice about how flattering you want to be, and it should be stated on the slide.
Read it as a ratio, not alone
CLTV in isolation invites the wrong comparison. The useful form is against acquisition cost, which is what the CLTV to CAC ratio measures, and against customer lifetime profit, which subtracts the cost of serving them.
The traps
- Revenue instead of margin.
- Net churn in the denominator.
- No horizon cap.
- A blended CLTV across segments that churn very differently, which describes
no real customer.
- Using it to justify acquisition spend before first-year retention is known.
Where this sits
CLTV is Measurement in the Tenbound Pipeline Architecture Standard, and it is the number most often used to justify a Market decision it cannot support. A high blended CLTV built on a well-retained segment will happily fund acquisition in a segment that churns.