Variations

It is important to know when a customer is generating profit for the firm. The number
of customers generating profit will depend on this value.
• 100 for beginning of year
• 100*(retention rate) for end of year)
• 0.5*100*(1+ retention rate) for middle of year)
Retention rate For eg. For 100 customers and retention rate to be 80%

Beginning Middle End

Year

Take number of Take number of Take number of

customers = 100 customers = 90 customers = 80

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 Variations
Similarly we have to account for discount rate depending on when a customer is
generating profit for the firm.
• End-of-year discount factor for year 1 is 1/1.10.
• Beginning-of-year discount factor for year 1 is 1.
• Middle-of-year discount factor for year 1 is 1/1.1^0.5
Discount rate
Beginning Middle End

Year

Multiply profit by Multiply profit by Multiply profit by

1 1/1.1^0.5 1/1.10

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 Variations

Often, the profit from a single customer depends on the length of association that
customer has with the organization.
Changing Margin
Usually, a loyal customer with 4-5 years of association would bring lot more revenue/
profit as compared to a new recently acquired customer
You can use varying margin as per your business to account for this effect.
 Variations
To estimate this, following data is needed:
• N = Number of purchases
• t = Time of last purchase
• T = Time elapsed between acquisition of customer and present time
Estimating the
Chance a
(T/t)^n estimates the probability that the customer is still active
Customer
Is Still Active For example, suppose that T = 10 and a customer has made a purchase at times 1, 5, 6,
and 9. You can estimate the probability that a customer is still active to equal 0.9^4 =
0.6561

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