Question

Net-4-You is an Internet Service Provider that charges it 1 million customers $19.95 per month for its service. The company variable costs are $.50 per customer per month. In addition, the company spends $.50 per month per customer, or $6 million annually, on a customer loyalty program designed to retain customers. As a result, the company monthly customer retention rate was 78.8 percent. Net-4-You has a monthly discount rate of 1 percent.

a. what is the customer lifetime value if the customer retention rates are 70% and 95%?

b. what do the results tell you about the impact of customer retention on CLV?

Answer 1

d discount = 1% for month

Which is 1x12 = 12% per year = 0.12

so d= 0.12

r = retention rate

GC = 1million x 19.95 - 0.5 x 1 million = 19900000

Where Cutomer life years = (1/ [1+d-r])

a)r = 70% = 0.7

Cutomer life years = (1/[1+0.12-0.7])

Cutomer life years = 2.38 years

CLV = GC x 2.38 - 6 million

CLV = 19900000x2.38 - 6000000 = 41362000$

r = 95% = 0.95

  Cutomer life years = (1/[1+0.12-0.95])

Cutomer life years = 5.88 years

CLV = GC x 5,88 - 6 million

CLV = 19900000x5.88 - 6000000 = 111012000$

b) The more the retention rate increases the the more CLV increases.