1.

A.) You have recently been asked by your boss to come up with an estimate of customer lifetime value for your firm's typical customer. Your firm sells high-end road and mountain bikes and related accessories. Customer contact is primarily on-line, through catalogs, targeted mailings, targeted e-mails and the occasional telephone call. After some digging around, and asking a lot of questions, you've been able to assemble the following information for a typical customer: Average order: $ 487 Frequency of orders: 1.7 /year Average margin: 61 % markup on retail Customer retention rate: 65 % Promotional/communication costs/yr $ 36 Your discount rate: 10 % Customer acquisition cost $ 320 Calculate the expected customer lifetime value for a new cutomer, rounded to the nearest dollar.

ANSWER: 357

B.)

Your firm sells high-end road and mountain bikes and related accessories. The following information is available to estimate customer lifetime value for a new customer: Average order: $ 536 Frequency of orders: 2.0 /year Average margin: 60 % markup on retail Customer retention rate: 59 % Promotional/communication costs/yr $ 31 Your discount rate: 12 % Customer acquisition cost $ 176 What is the maximum amount your firm can afford to spend to increase customer retention from 59 % to 80 %? Report your answer rounded to the nearest dollar. To answer the question, calculate CLV at the higher retention rate and subtract the CLV at the lower retention rate. The difference will be the maximum amount the company can afford to spend to increase customer retention.

Answer: 849