Discounted LTV

A dollar received three years from now is not worth a dollar today. Simple LTV formulas treat all future revenue equally, which overstates the present value of long-lifetime customers. Discounted LTV applies a time-value-of-money adjustment — typically using your cost of capital or a target return rate — to produce the net present value of the customer relationship. For companies with capital costs above 10%, the difference between simple and discounted LTV can be 20-30%.

Discounted LTV — Enterprise Segment:
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Annual Gross Profit:  $144,300  ($185K × 78% GM)
Annual Churn Rate:       4.8%
Discount Rate:          12.0%  (WACC)
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Simple LTV:    $144,300 / 0.048  = $3,006,250
Discounted LTV: $144,300 / (0.048 + 0.12) = $859,286

Formula: Annual Gross Profit / (Churn + Discount Rate)

The discount rate reduced LTV by 71%.
This is the present value of the
customer — what you should actually
be willing to pay to acquire them.