Standard lifetime value formulas divide gross profit by a churn rate. That works for a business where accounts only shrink. It undervalues every SaaS business where existing customers buy more over time, which is why the NRR version is the one most revenue teams use.
``` LTV = (Annual Revenue per Account x Gross Margin %) / (1 - NRR) ```
The calculation step by step
Start with revenue per account for one year, then apply gross margin to get annual gross profit. Take net revenue retention for the same cohort, subtract it from one, and divide.
| Input | Example value |
|---|---|
| Annual revenue per account | 50,000 |
| Gross margin | 80 percent |
| Annual gross profit | 40,000 |
| Net revenue retention | 90 percent |
| Divisor (1 minus NRR) | 0.10 |
| LTV | 400,000 |
What to do when NRR exceeds 100 percent
Above 100 percent the divisor turns negative and the formula fails. Two corrections work.
Cap the horizon. Project annual gross profit forward for a fixed number of years, growing each year by the expansion rate, and discount back to present value. Three to five years is the practical limit, because forecasting a single account's expansion beyond that is guesswork. Use a discounted perpetuity. Divide annual gross profit by the discount rate minus the growth rate, where growth equals NRR minus one. The formula only holds when the discount rate exceeds the growth rate, which is another way of saying no account expands forever.Where the number goes wrong
The formula inherits every weakness of the NRR input. Blended NRR across cohorts of different ages produces a lifetime value that moves with customer base composition rather than behavior. A handful of large expanding accounts can carry the blended figure while the median account contracts.
Run net revenue retention by cohort, calculate LTV per cohort, and compare each one against the acquisition cost of that same period. That comparison tells you whether acquisition is getting better or worse, which a blended lifetime value never will. Cohort-level values also make better inputs to sales forecasting, since expansion revenue forecasts should follow the same retention curves used to value the customer.
Frequently Asked Questions
What is the formula for LTV using NRR?
Divide annual revenue per account multiplied by gross margin percentage by one minus net revenue retention. An account paying 50,000 dollars a year at 80 percent margin contributes 40,000 dollars of annual gross profit. At 90 percent NRR the divisor is 0.10, which gives a lifetime value of 400,000 dollars.
What happens when NRR is 100 percent or higher?
The divisor becomes zero or negative and the formula returns an infinite or nonsensical lifetime value. Use a capped horizon instead, projecting gross profit forward a fixed number of years with the expansion rate applied and discounting each year back to present value. Cap the horizon at three to five years, because forecasting a single account's expansion beyond that is guesswork.
Why use NRR rather than a churn rate in the LTV formula?
A churn-only formula ignores expansion, so it undervalues every account in a business where existing customers grow. NRR nets contraction and churn against upsell and cross-sell in one figure, which reflects what an account is actually worth over time. The tradeoff is that NRR blends two behaviors, so a strong expansion motion can hide a churn problem underneath it.
Should you use blended NRR or cohort NRR?
Use cohort NRR. Blended NRR mixes mature accounts that have already expanded with new accounts that have not started, which produces a lifetime value that drifts with the age mix of the customer base rather than with actual retention behavior. Cohort NRR gives a value per acquisition period that you can compare against the acquisition cost of that same period.
Put these metrics to work
ORM builds custom revenue forecast models that turn concepts like how do you calculate ltv with nrr? into prescriptive action for your team.
Schedule a Demo