Question

Patrick rents car from a local car rental company. On average he spends 100 a month. The company's contribution margin is 35 percent and the average customer defection is 50 percent. Determine the value of a loyal customer. Use the VLC template.

Answer 1

To be calculated:

Value of a loyal customer (VLC)

Formula used:

VLC = (P) x (RF) x (CM) x (BLC)

where,

VLC = Value of loyal customer

P = Revenue per unit

RF = Repurchase frequency

CM = Contribution margin

BLC = Buyer’s life cycle

Also,

BLC = (1 / DR)

where,

DR = Defection rate

Therefore,

VLC = (P) x (RF) x (CM) x (BLC)

VLC = (P) x (RF) x (CM) x (1/DR)

Given values:

Revenue per unit, P = $100

Repurchase frequency, RF = once per month = 12 times per year (Since, RF is not mentioned explicitly, let us assume that Patrick rents car once every month and spends $100 on each hire)

Contribution margin, CM = 35% = 0.35

Average defection rate, DR = 50% = 0.50

Putting the given values in the above formula, we get;

VLC = (P) x (RF) x (CM) x (1/DR)

VLC = ($100) x (12) x (0.35) x (1/0.50)

VLC = $840