Question
Homework 4, Ch. 5: Calculating Customer Lifetime Value Introduction Customer lifetime value (CLV) is a good way of demonstrating the financial return on marketing activities,
Homework 4, Ch. 5: Calculating Customer Lifetime Value
Introduction
Customer lifetime value (CLV) is a good way of demonstrating the financial return on marketing activities, particularly as the return is often generated over several years. The basic calculation for CLV is:
CLV = ((annual revenue - annual costs) X years a customer) less initial acquisition costs
Part A: Your first task is to calculate the CLV for two retailers (with an example provided to assist you). Which of the two retailers have the more valuable customers?
Part B: Redo the calculations, but this time do NOT take into account `years a customer'.
That is, assume that they are only customers for one year only.
In this case, which of the two retailers have the more profitable customers now? Therefore, how important is it for firms to try and enhance customer loyalty (that is, years a customer)?
Activity/Task
(PART A) AVERAGE CUSTOMER | Example (See below) |
Retailer A |
Retailer B |
Annual Revenue |
$500 |
$3,000 |
$1,100 |
Annual Costs |
$100 |
$1,000 |
$100 |
Annual Profit |
$400 |
? |
? |
Years a Customer |
5 yrs |
5 yrs |
3 yrs |
Profit X Years |
$2,000 |
? |
? |
Acquisition Cost |
$500 |
$2,000 |
$500 |
CLV |
$1,500 |
? |
? |
(PART B) | Example (See below) |
Retailer A |
Retailer B |
Annual Revenue |
$500 |
$3,000 |
$1,100 |
Annual Costs |
$100 |
$1,000 |
$100 |
Annual Profit |
$400 |
? |
? |
Years a Customer |
Looks at 1 yr only |
Looks at 1 yr only |
Looks at 1 yr only |
Profit X Years |
$400 |
|
|
Acquisition Cost |
$500 |
$2,000 |
$500 |
CLV |
- $100 (Loss) |
|
|
Discussion Questions
Comparing your calculations in Part A and Part B, if firms just look at a customer's immediate return (that is, one year's income), will that lead to poor decision making? |
|
Referring to Part A, would the retailers benefit more from:
|
|
Given your response above, using a rough estimate, what proportion (%) of these retailers' promotional budget should be allocated to enhancing customer loyalty? |
|
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