Buyers’ Bubble Inc. is a successful, medium-sized operation that markets two products - widgets and pidgets. The company’s management is considering expanding its customer base. At a recent marketing conference, the Managing Director of the company is exposed to the concept of customer lifetime value (CLV). He would like to utilise this concept to test the feasibility of the company’s expansion plans. The firm thus hires a marketing consultant to prepare some estimates for the hotel. Below are the estimates prepared by the consultant:

The amount of new customers will be equivalent to 10% of the customer base at the end of the year.

The business currently has 21,600 customers but it expects this amount to shrink by 8% by year end.

Projected yearly retention rates are:

Yr 1	Yr 2	Yr 3	Yr 4	Yr 5
60%	75%	80%	90%	100%

Projected acquisition costs (per customer) consist of the following:

Promotion costs: $500

Credit checks $350

Setting up account $200

Miscellaneous costs $55

Yearly retention cost (per customer) $255

Desired rate of return: 20%

The campaign will run for one year (Year 0)

The Present Value Interest Factors (PVIF) based on a 20% rate of return are:

	Yr 0	Yr 1	Yr 2	Yr 3	Yr 4	Yr 5
PVIF (20%)	1.000	0.833	0.694	0.579	0.482	0.402

The consultant also indicates to management that she expects all the operating revenue and costs patterns to be the same for these acquired customers as for those already serviced. Based on historical patterns the average customer buys 15 widgets and 10 pidgets per year. One widget sells for $80, while a pidget sells for $60. Historically, a widget costs the company 25% of the selling price and a pidget 35%. However, from year four (4) the cost of a widget will go to 30% of the selling price and pidgets to 38% of their selling price. Based on the company records, defecting customers are expected to default on their bills, so the establishment will incur yearly bad debts of 10% of the revenue from widgets and 15% of that from pidgets. These bad debts are recognised in the same year in which the customers default.

It has been found that 25% of customers make referrals to the establishment yearly. The value of these referrals is calculated as a one-time amount that is directly attributed to the profits. Based on historical data each person referred purchases 10 widgets and 8 pidgets a year. The referrals do not incur any bad debts.

Based on the above information, management of Buyers’ Bubble Inc. asks you to calculate the per customer CLTV in dollars and to give a brief recommendation concerning the feasibility of the program.