Sprint charges its current customers an average of $55 per month. It costs Sprint $4.50 per month to serve these customers. It also spends $3 per customer per month to keep these customers loyal. Over the last few years Sprint has been able to retain 80% of its customers. Assume a discount rate of 5% annually.

a. Calculate Sprints customer lifetime value of its current customers. [2]

b. Sprint is willing to spend $320M in advertising to 10 million viewers, and $375M in buying out contracts for T-Mobile and AT&T customers. They expect that at least 10% of those in the targeted group will switch. In addition to cutting rates of these potential customers, leading to an average monthly price of $40 per month per customer. These customers would also pay $50 in activation fees. Calculate the CLV for these customers at the same discount rate, retention spending, and variable cost, however the retention rate is expected to be 88% for these new customers. (hint: Initial margin = activation fee) [3]

CLV=Initial margin+ Mr/((1+d-r))-AC

c. What is the minimum acquisition rate they would need to achieve for this promotion to be justified (breakeven acquisition rate)? [2] Breakeven Acquisition Rate= (Acquisition Spending)/CLV

d. Assume that Sprint they fell short of the 10% goal, and got 7.5% of the targeted customers to switch, and year-to-year Sprint can increase their margins from these customers by 6%. Out of the buyout money, they paid an average of $125 in early termination fees per customer. Calculate their new CLV using the acquisition cost. (Hint: use the formula with g. AC = [advertising/number of people who switched] + average buyout cost). [3]

CLV = Initial + M x r - AC (1+d-r[1+g])