Exercise 1: Record Store

Richard is the director of marketing for DiVinyls Collectibles that deals in hard to find new and used records. It is a direct-mail music operation that sells records via mailed catalogs to hard-core audiophiles. He wants to better understand the lifetime value of the customers who buys music from his store so he can determine if he should implement specific marketing initiatives. Richard would like to calculate the 3-year lifetime value of a new cohort of customers he has recently acquired based on the accounting information he has below:

• The average customer spends $450 per purchase.
• The gross margin associated with these sales is 65% (high due to acquisition costs).
• The cost to ship each purchase (a bundle of records and appropriate packaging) is $25.00 that the customer pays. Divinyls Collectibles only accepts checks and money orders; no credit cards are accepted. Orders are place by returning a pre-paid ordering envelop and return postage is included as part of the mailing costs of the monthly catalogs. Thus, no additional expenses and profits are incurred with respect to shipping and handling.
• The average audiophile customer buys from the catalogs roughly 8 times a year.
• The average cost of mailing the catalogs is $20 per customer per year.
• With respect to acquisition costs, the response rate for sending catalogs to a new customer base is 2%.
• Customer retention is about 75% from one year to the next.
• The discount rate is 10%.

Please submit the following:

• Please state any additional assumptions necessary and create the CLV model in Excel. Calculate a typical customers CLV.
• Propose one change (adjusting one or more existing assumptions) that can increase CLV. Create a second model to demonstrate in increase.