Question

3. Let’s start the CLV analysis by making some calculations using the formula provided in the text.

For this calculation, M = 15.49 (price of $19.99 less $4.50 variable cost per unit ). For this exercise, we will assume the discount rate, “d” is 12% per year, or 1% per month.

a. What is the CLV if we use the contribution margin per unit sold ($15.49) for “M”, at the current retention rate of 99%? Do this calculation using CLV = {$M x [ r / (1+ d – r)]}. For "d", use 1% per month (12% per year /12 months per year).

b. What happens to CLV when the retention rate decreases? Using the contribution margin ($15.49) for M, calculate CLV at both a 95% and a 90% retention rate, and compare these to the 99% retention rate used above.

c. Summarize your observations of the above calculations in a single sentence, and in a second sentence, discuss the implications of the relationship of retention rate to CLV and long-term profitability.

Answer 1

a) CLV = {$M x [ r / (1+ d – r)]} = {15.49x [ 0.99 / (1 + 0.01 - 0.99)]} = 766.755

b) at r = 90%, CLV = {$M x [ r / (1+ d – r)]} = {15.49x [ 0.90 / (1 + 0.01 - 0.90)]} = 126.736

at r = 95%, CLV = {$M x [ r / (1+ d – r)]} = {15.49x [ 0.95 / (1 + 0.01 - 0.95)]} = 245.2583

c) The fall in CLV is more than the proportionate fall in retention ratio.

CLV gives a very clear picture of the benefit from the customer over the lifetime of the relationship. A high retention ratio relfects a strong bonds and loyalty which results into a very high CLV as it is shown above. A high retention ratio is very important for the profitable CLV and a sustainable business.