This scenario looks at the impact of a loyalty program on CLV. Usually, we would expect a loyalty or rewards program to increase the frequency of purchase, and or average spends per purchase. The increase in gross margin delivered by the average customer at the new spend and frequency numbers will grow estimates of CLV. The question is how much? What levels do we need to grow for the program to be viable? Estimated CLV is a good measurement to determine the long-term viability of the program.

Today we will look at the average CLV of a Starbucks Customer prior to the Starbucks Rewards Program. We will then look at the change in purchase behavior after the program inception and the associated program costs. We can determine the success of the program.

You will need to calculate CLV pre and post, less the program costs for the post group.

Pre-Rewards	Post-Rewards
Spending/Customer	$ 5.90	$5.95
Cost of Goods	25%	25%
Frequency of Visit/Week	4.2 times/week	4.9 times/week
Cost of Reward Program	NA (PRE REWARDS)	9.5% discount, plus .5 administrative, total of 10%

1. Calculate the Average Customer LTV PRIOR to the Rewards Program, assuming the customer relationship is assumed to be 25 years. Show your work.

2. Utilizing the process you used prior, determine the LTV of the Post Reward Program customer. (Points are generated at the 2 points per dollar spent, and a free product is earned every 125 points. For every $62.50 spent, the average customer redeems $5.95 (or 9.5%) This reward system has administrative costs of .5%.) Total costs are estimated at 10%

3. What if the frequency of visit remains 4.2, how much increase in spending/customer is needed to make the reward program profitable?

4. If the spending/customer grows to $6.00, how much growth in frequency is needed to make the reward program profitable?