Question

3. A cable company spends on average $600 to acquire a customer. Over time, 80% of customers remain with the company from one year to the next. The discount rate is 12%. Costs to serve each customer are: annual maintenance costs - $45; annual record-keeping and billing costs - $30. Revenue is as follows:

	Price per Month	% of Customers
Basic Service	$30	50%
Premium Service	$50	40%
Super Premium Service	$80	10%

1. What is the annual profit margin for an average customer?
2. What is the CLV for an average customer?
3. What is the CLV for a Super Premium customer?

Answer 1

Given that

• Number of years that they are a customer of the brand = 5 years ( see note 1 )
• Cost to acquire the customer = $600
• discount rate 12%
• Retention Rate 80%
• annual maintenance costs - $45; annual record-keeping and billing costs - $30.

Working Note 1

converting retention (loyalty) rates to an average customer lifetime period. However, it is quite easy to calculate the customer lifetime in years from a retention rate, as follows:

100% divided by (100% minus the annual retention rate)
OR (1 / 1- annual retention rate)

So in this example of an 80% loyalty rate, the average customer lifetime would be:

100% / (100% -80%) =
100% / 20% = 5 years average customer lifetime period

($30*.5+ $50*.4+$80*.1) = $43 (annual profit from the customer) X

5 (number of years that they are a customer) less

$600-$45-$30(acquisition cost) = $525

That is, $43 X 5 – $525= - $310