Suppose that Caf Espresso, a local coffee shop, is considering a new marketing program that would reward customers for frequent purchases. Currently, the average customer spends $200 per year at Caf Espresso, with a margin of 30%. Customer churn is currently 20% per year. The program would offer a reward of a free drink after every 9 drinks, resulting in a discount of 10% for returning customers. The forecast is that this program would reduce customer churn from 20% to 15% (although there is no expected impact on the acquisition of new customers or on unit sales). While the program would reduce the margin due to the discount for every 10 th drink, there would be no direct costs associated with implementing the program. Caf Espresso does use a discount rate of 5% in planning for future revenues and expenses.

i) What is the current $ margin annually per customer?

ii) What would the $ margin per customer be on an annual basis with the reward program (assuming all customers participate in the program and Espresso sees the average discount based on the reward)?

iii) What is the CLV of a customer currently?

iv) What would be the CLV of a customer if Caf Espresso implements the customer reward program?