How many people are taking this approach for the new revenue recognition standard and applying this metric to the aggregate direct sales commissions generated per period versus deferring the expense on a contract by contract level?
Average Customer Lifetime Metric for Commissions Expense
Answers
"The revenue standard permits an entity to apply the guidance to a portfolio of contracts (or performance obligations) with similar characteristics if the entity reasonably expects that the effects on the entity’s financial statements of doing so would not differ materially from the results of applying theguidance to individual contracts (or performance obligations). The boards acknowledged in their basis for conclusions that this approach may be particularly useful to entities in the telecommunications industry. The boards also noted that entities should be able to take a “reasonable approach” to identify portfolios for applying this guidance, as opposed to a quantitative evaluation."
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Good answer Jordan!
Thanks for bringing up this topic. Is there a widely used metric for average customer life? I haven't been able to find a specific equation. We have a service business that is highly dependent upon contract renewals. Our internal metric is sensitive to rapid growth and doesn't feel adequate for the purpose of future GAAP. (Like telecommunications, we have some up front fees which may require spreading revenue over time.)
Hi Kathie, Does having a large portion of your customer base as perpetual weigh against the rapid growth? Are you using payment start dates and end dates for your metric?
Cory, those factors could come into play but I think are secondary to the harder to solve issue of finding a reasonable measure. There are a lot of references out there to average customer life (especially within the Customer Lifetime Value metric), but it's always a given value, with no mention of how the value was derived. I can search on other commonly used metrics, such as Customer Retention Rate and Customer Churn (which are related, but not the same), and find an equation that makes perfect sense but is not particularly intuitive (meaning I wouldn't have come up with it on my own).
One equation I've seen is 1 / Customer Churn, but that doesn't take into account growth at all. However, I'm going to go with that one in the absence of something more suitable.
Measuring average lifetimes as the inverse of customer churn rates looks very compelling. I like it for businesses that aren't too sensitive to subscription churn measured on a quarterly basis. I would think account growth would have an effect, but a lagging effect at that.
The principal guidance is demonstrating how this metric would be materially similar to doing it the current contract level method. Any approaches here?