Question

At Dive Shop Inc, regular customers place about 3.4 orders per year. These orders average $96 in retail value, and contribution margin percent is typically 44%. Acquiring a new customer costs Dive Shop about $128, and Dive Shop also spends $32 per customer per year on contests, deals, and communications to keep them coming back. Dive Shop's retention rate is 84%, and the corporate discount rate is 10%. Calculate the net present value of 1 regular customer at Dive Shop. Rounding: penny. Remember, the answer may be negative. Please show written work.

Answer 1

CALCULATION OF NPV OF 1 REGULAR CUSTOMER-

Average number of orders per customer per year (a)	3.4
Average value per order (b)	$96.00
Total Revenue (c=a*b)	$326.40
Contribution @44% (d = c*0.44)	$143.62
Less: contest deals and comm ( e )	$32.00
Benefit per customer per year (f=d-e)	$111.62
Retention ratio (g)	84%
Net Benefit per customer per year (h=f*g)	$93.76

PV of benefit derived from one customer = ( Net benefit per customer / Discount rate )

= ( $93.76 / 0.10 )

= $937.60

Net present value per customer = (PV of benefit derived from one customer - Customer acquisition cost)

=$937.60 - $128

Net present value per customer = $ 809.60

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