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For some ten years I have advised students in my entrepreneurship class to use a 40% discount rate in their lifetime value calculations. Every semester someone decides to take advice they found on the internet and use a much lower rate. It does seem like, of the advice given, mine is at the high end. For instance:

Since the contribution for customers paid in years further out in the future is less valuable than those paid in more recent years, it is important to discount these future cash flows to the company. Although the “ideal” discount rate factors in the beta to account for the riskiness of the cash flows, one can stick to a shorthand of using something like 10%.

Tom and I agree that calculating things like LTV is important (he talks extensively about it in his excellent Why Startups Fail.) But I think his rate is way too low. Of all the suggested discount rates I have seen, all of them are too low. In fact, my suggestion of 40% is probably too low.

This may seem like a dumb thing to get worked up over, but it makes a difference. A hundred dollars ten years from now is worth $39 today if you discount it at 10% per year; it is worth about $3.50—less than one-tenth the amount—if you discount it at 40% per year. For things that last a long time the rate makes a huge difference. But even for customer lifetime value, where the average lifetime may be much shorter, say three years, that $100 is worth $75 at 10% but only $36 at 40%. If you use 10% instead of 40% you double the estimated value of a prospective customer. If this is a faulty assumption you will end up investing in marketing strategies that suck value out of your company.

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