What Discount Rate Should Be Used?

 

Choosing a Discount Rate for CLV

It would be difficult to argue for a discount rate of any less than 5%, as very few marketing environments are that stable and predictable in today’s world. A discount rate of 10% is commonly used, as it is generally around the return that firms make on their other investments.

In some organizations, it is known as a “hurdle” rate. This is the minimum level of return that a firm is willing to accept for its investment/expansions as this is what it would make if it reinvested in its own business.

To explain that point further, if a retailer was progressively expanding stores into new geographic areas which have the impact of generating a 10% return on these investments – then any investment opportunity (including investing to increase customer lifetime value) would need to be able to demonstrate a return in excess of 10% to make it worthwhile. Otherwise there is no financial incentive to change their successful strategy.

If the firm is in a very dynamic and uncertain marketing environment – perhaps in the Internet field or technology or is facing emerging competition – that even a higher discount rate of 15 to 20% right be appropriate, as it will reflect the uncertainty going forward.

If a firm normally uses the net present value financial metric to evaluate projects, investment choices and new products, then they will have an established discount rate that they regularly use.

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