FA-301b · Module 1

Expansion-Adjusted LTV

3 min read

Standard LTV models assume flat revenue over the customer lifetime. In reality, the best customers expand: they add seats, upgrade tiers, purchase additional products. Expansion-adjusted LTV incorporates net revenue retention into the lifetime value calculation, which can increase the number by 30-60% for companies with strong expansion motion. Ignoring expansion in LTV calculations understates the value of your best customers and leads to under-investment in acquisition.

Enterprise LTV — Three Methods:
──────────────────────────────────────────────────────
Method                          LTV        Difference
──────────────────────────────────────────────────────
Simple (flat revenue):       $3,006,250      baseline
With expansion (NRR 118%):   $4,014,000       +34%
Discounted + expansion:      $1,108,462       -63%
──────────────────────────────────────────────────────

Expansion Formula:
  LTV = (ARPA × GM%) / (Gross Churn - Net Expansion)
  LTV = $144,300 / (0.048 - 0.18*0.78)
  Note: Only works when churn > expansion rate

Alternative — Year-by-Year Model:
  Year 1: $144,300 × 1.00 = $144,300
  Year 2: $144,300 × 1.14 = $164,502  (NRR adj.)
  Year 3: $144,300 × 1.30 = $187,590
  ... sum and discount to NPV

Year-by-year is more accurate for
high-expansion segments.

Do This

Include expansion revenue in LTV using segment-specific net revenue retention
Use year-by-year models for segments with strong expansion — the formula breaks at high NRR
Deduct the cost of expansion sales from the expansion revenue before adding to LTV

Avoid This

Assume flat revenue over the customer lifetime when net retention exceeds 105%
Use the same expansion rate for all segments — enterprise expands differently than SMB
Include expansion revenue without deducting expansion sales cost — that overstates net value