Using a Discount Rate in CLV
The simple calculation of customer lifetime value can be undertaken without use of a discount rate.
This will provide a rough ballpark measure that may be appropriate to help with marketing budget allocations.
Also, if firm has a very high turnover (or churn rate) then a discount rate probably does not alter customer lifetime value outcome to a significant extent.
For example, a college or university would have a customer lifetime of around three years on average. While some students will stay longer, other students will drop out in the first semester, resulting in an average of around three years. Because the majority of revenues are generated in this three-year period, applying a discount rate will have some impact on the calculation that may not be overly influential.
Compare this to a banking firm that may hold customers for 20 or 30 years. In that case, because of the length of time of the cash flows, it is critical to utilize an appropriate discount rate in the customer lifetime value formula. The customer lifetime value template, available download on this site, shows both gross and discounted customer lifetime values for ease of use.
It is recommended, however, that in a professional company that you use a discount rate when determining customer lifetime value.
What is the role of a discount rate?