CLV calculation,
Business Finance
The answer should be from three-quarters of a page to a page and single-spaced.
A well-known coffee company with cafes throughout the U.S. (and the world) is evaluating the Customer Lifetime Value (yearly) for three customers that joined its U.S.-based loyalty program five years ago. Customer A is a coffee aficionado that enjoys savoring a customized cup at the café in the morning on both weekdays and weekends, chatting with his favorite baristas as part of his morning ritual. Customer B drinks plain coffee as part of her morning routine to wake up, passing through the café on the way to work (or weekend activities), and values quick, efficient service. Customer C picks coffee flavored drinks or other beverages and snacks off the menu at the café in the afternoon, often in the company of co-workers (or family and friends on the weekend) as part of an afternoon treat.
The values below represent the revenue the firm received from these customers over the past five years. The firm’s marketing analytics department calculates the yearly retention rate for all three customers at 80% (and assumes 100% survival probability in year 1). The discount rate is 15%, and typical acquisition cost of all three customers is $65.00. Variable cost per dollar the customer spends is $0.20. Fixed costs of the loyalty program are $30.00 per year. Using the table provided below, calculate TWO CLV values for each customer; (1) without taking into account retention and (2) including customer retention. Which customer is the most valuable to the firm? Does it vary across the two calculations? Why or Why not?
Next, using your knowledge of the AER framework, develop an expansion and retention strategy for the customer (segment) you identified as the best above. Your goal is to try and maximize their value to the firm in the future (e.g., increase their CLV).
|
Customer |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
|
Customer A (5 year average $1,140) |
$500 |
$1,500 |
$1,500 |
$1,200 |
$1,000 |
|
Customer B (5 year average $780) |
$600 |
$1,100 |
$800 |
$600 |
$800 |
|
Customer C (5 year average $1,180) |
$1,000 |
$800 |
$1,000 |
$1,500 |
$1,600 |
