{"id":1919,"date":"2022-04-11T11:16:00","date_gmt":"2022-04-11T04:16:00","guid":{"rendered":"https:\/\/mintea.blog\/?p=1919"},"modified":"2022-04-11T11:16:22","modified_gmt":"2022-04-11T04:16:22","slug":"1919","status":"publish","type":"post","link":"https:\/\/mintea.blog\/?p=1919","title":{"rendered":"Should the customer lifetime period be capped at five years"},"content":{"rendered":"<p><strong>Should the customer lifetime period be capped at five years?<\/strong><\/p>\n<p><strong>Can a customer lifetime period more than five years?<\/strong><\/p>\n<p>The\u00a0<a href=\"https:\/\/www.clv-calculator.com\/free-clv-excel-templates\/\">customer lifetime value template<\/a>\u00a0provided on this site provides calculations in excess of five years and actually includes potential customer revenues up to 50 years. This may seem an excessive period time, but the customer lifetime value calculation can also be used in business to business markets where long-term supply relationships are indeed possible. And there are also some consumer markets where there could be very long (virtually lifetime) customer relationships \u2013 such as, banking, insurance, and even basic products like toothpaste and soap.<\/p>\n<p>However, if you use a discount rate and a customer retention rate in your customer lifetime value calculation, this automatically safeguards against your customer lifetime value number being excessively large. In fact, even at an 80% customer retention rate and a 10% discount rate, the contribution of customer revenues beyond 10 years is quite minimal.<\/p>\n<p>Let\u2019s use an example to explain \u2013 which has been calculated using the\u00a0<a href=\"https:\/\/www.clv-calculator.com\/free-clv-excel-templates\/\">customer lifetime value template<\/a>.<\/p>\n<ul>\n<li>Customer acquisition cost = $1,000<\/li>\n<li>Profit contribution per customer per year = $1,000 pa<\/li>\n<li>Retention rate = 80%<\/li>\n<li>Discount rate = 10%<\/li>\n<li>Customer lifetime value (CLV) = $2,333<\/li>\n<\/ul>\n<p>Because of the combined effect of the reducing customer base and the heavier discounting of customer profit contribution over time \u2013 the extra contribution of the customer profits beyond the 10 year horizon is $138 or 5.9% in the above\u00a0<a href=\"https:\/\/www.clv-calculator.com\/customer-lifetime-value-formulas\/clv-formula\/clv-equation\/\">equation<\/a>.<\/p>\n<p>If we only considered a 10 year horizon and assume that there were no customers left at that time \u2013 the customer lifetime value above would be $2,195. Likewise, if we only use a five year time horizon and assume that there are no customers of value after the five year point \u2013 then the above customer lifetime value calculation would become $1,655.<\/p>\n<p>Let\u2019s combine all of these figures into one table (see below) \u2013 and remember this is for 80% retention and 10% discount rate. As you can see over 70% of the customer value is derived in the first five years, with a further 23% of value being delivered in years 5 to 10. It makes sense to include revenues from 5 to 10 years, as retention is relatively high, and even a small proportion of revenue beyond the 10 year horizon.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" width=\"300\" height=\"147\" class=\"wp-image-1920\" src=\"https:\/\/mintea.blog\/wp-content\/uploads\/2022\/04\/table-showing-impact-on-longer-term-customer-lifet.png\" alt=\"table showing impact on longer-term customer lifetime periods\" \/><\/p>\n<p>Let\u2019s look at the same example, but this time using a 60% retention rate and a 15% discount rate. As you can see, the combined effect of these two factors virtually eliminates any real values stemming from longer term cash flows.<\/p>\n<p>In this case, over 90% of the customer lifetime value is generated in the first five years. And even with a 60% retention rate, expected customer profits in the 5 to 10 year time period only add about 8% of value. At 60% retention, a firm should expect that some customers are still purchasing from the brand\/firm in the 5 to 10 year horizon, so it is quite appropriate that some revenue is incorporated.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" width=\"300\" height=\"143\" class=\"wp-image-1921\" src=\"https:\/\/mintea.blog\/wp-content\/uploads\/2022\/04\/table-with-long-term-clv.png\" alt=\"table with long term CLV\" \/><\/p>\n<p><strong>Why use a five-year cap on the customer lifetime period?<\/strong><\/p>\n<p>The counter argument provided as to why cash flows should not be considered past the five year horizon is because of the uncertainty of forecasting that far ahead in a dynamic environment. That is the role of the discount rate. If some of the numbers in the customer lifetime value calculation rely heavily upon assumptions, then it would be inappropriate to increase the discount rate in the calculation to compensate. That is, because they are possibly less reliable, the heavier discount rate will reduce their impact in the calculation \u2013 as demonstrated in the two tables on customer lifetime period scenarios.<\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Should the customer lifetime period be capped at five years? Can a customer lifetime period more than five years? The\u00a0customer lifetime value template\u00a0provided on this site provides calculations in excess of five years and actually includes potential customer revenues up to 50 years. This may seem an excessive period time, but the customer lifetime value &hellip; <a href=\"https:\/\/mintea.blog\/?p=1919\" class=\"more-link\">Continue reading <span class=\"screen-reader-text\">Should the customer lifetime period be capped at five years<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":1674,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[25],"tags":[32,63,62,55,56,26,54],"class_list":["post-1919","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-bookmarked-articles","tag-analytic","tag-clv","tag-crm","tag-customer-analytic","tag-customer-lifecycle","tag-data","tag-data-mining"],"_links":{"self":[{"href":"https:\/\/mintea.blog\/index.php?rest_route=\/wp\/v2\/posts\/1919","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mintea.blog\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mintea.blog\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mintea.blog\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/mintea.blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1919"}],"version-history":[{"count":2,"href":"https:\/\/mintea.blog\/index.php?rest_route=\/wp\/v2\/posts\/1919\/revisions"}],"predecessor-version":[{"id":1923,"href":"https:\/\/mintea.blog\/index.php?rest_route=\/wp\/v2\/posts\/1919\/revisions\/1923"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/mintea.blog\/index.php?rest_route=\/wp\/v2\/media\/1674"}],"wp:attachment":[{"href":"https:\/\/mintea.blog\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1919"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mintea.blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1919"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mintea.blog\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1919"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}