CLV Practice Problem Time to apply the notion of discounted cash flows to a CLV problem. The basic approach we're going to use is to: 1. Total up all the revenues and expenditures that occur each year 2. Use the NPV formula we discussed to discount these annual net cash flows to express them in current dollars, and... 3. Add each year's discounted cash flows together to calculate CLV. OK, here's a straight-forward CLV problem. Imagine that a company called MattVantage wants to assess the average value of a customer. Here are the details related to customer acquisition, customer servicing, and revenue. Acquisition costs: MattVantage will use an influencer campaign to acquire its customers. All the associated costs occur in Year 1 and the average customer acquisition cost is $400. Service costs: MattVantage takes great care of its customers and once they are signed up with us there are expenses associated with this service. The average cost of servicing a customer is \$75 per year. (After all, our service and support reps don't work for free!) Revenue: It takes a while to acquire a new customer so on average, no revenue occurs for a new customer in Year 1. On average, a customer will stay with MattVantage until the end of Year 5. Here are the average projected revenues for a MattVantage customer: Discount Rate: The discount rate in this example is 8%. CLV Table \begin{tabular}{|l|l|l|l|l|l|} \hline Inflow / Outflow & Year 1 & Year 2 & Year 3 & Year 4 & Year 5 \\ \hline Revenue & & & & & \\ \hline Acquisition costs & & & & & \\ \hline Service costs & & & & & \\ \hline Annual net cashflows (CF) & & & & & \\ \hline Sum of all CFs* & & & & & \\ \hline Denominator & & & & & \\ \hline Discounted CF (DCF) & & & & & \\ \hline Sum of all DCFs & & & & & \\ \hline \end{tabular}