Question

a) Suppose that Virgin enters the market with a pre-paid plan, charges $0.25 per minute and offers a handset subsidy of $60. Such an attractive offer decreases the churn rate for Virgin to 3% per month (instead of the 6% given in the case). What is the customer lifetime value for Virgin? (6 points)

b) In the above situation, if Virgin runs a reward program for their customers then it will cost them a one-time charge of $60 per customer but the churn rate will fall to 1% from 3%? Should Virgin implement the reward program? (4 points)

Answer 1

a)

CUSTOMER LIFETIME VALUE (CTV) is the value of customer in terms of how much service or product he/she will purchase in his/her lifetime or simply it is the value of keeping customers loyal.

Given:

1. Yearly Churn Rate= 3*12= 36%
2. Margin/Revenue generated by a customer in a year = M = 0.25*525600= $1,31,400
3. Acquisition cost (handset subsidy) =AC = $60
4. Annual retention rate = (1- yearly churn rate)= 1-36%= 64%
5. Average lifetime in years = 1/churn rate = 1/36%= 2.78 years

CTV= ( Average lifetime in years x Margin/Revenue generated by a customer in a year ) - Acquisition cost

CTV= 2.78 x 131400 - 60

CTV=365000-60

CTV= 364940

b)

AFTER REWARD PROGRAM:

yearly churn rate = 12%

revenue generated = 60

Average lifetime in years = 1/churn rate = 8.33

AC = 60

CTV= 8.33 x 60 - 60

CTV= 500-60

CTV = 440

therefore, reward programame should not be implemented.