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CLV - Essay Example

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In order to determine the length of time it will take AT&T to break even on a new customer the average cost of acquiring a new customer is divided by the monthly contribution monthly to fixed cost as follows.
Gupta et al in ‘Modeling Customer Lifetime Value’ indicate that…
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CLV
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15 July Lifetime Value Question Part a Average cost of acquiring new 370 Average monthly payment 60
Less: Average monthly cost 35
Monthly contribution 25
In order to determine the length of time it will take AT&T to break even on a new customer the average cost of acquiring a new customer is divided by the monthly contribution monthly to fixed cost as follows.
The number of months to break-even = 370/25 = 14.8
Therefore, it takes AT&T approximately 15 months on average to break-even on a new customer.
Part b
According to Gupta et al (2006: 141) the customer lifetime value (CLV) for an average AT&T customer can be calculated using the following formula:
CLV =
Where m is the margin, r the probability of repeat buying, i the discount rate.
m = $25 x 12 = $300 per annum
r = churn rate multiplied by 12 = 1.22% x 12 = 15% per annum
i = 1% x 12 = 12% per annum
CLV = $300 x (0.85/(1 + 0.12 - 0.85)) = $300 x (0.85/0.27) = $300 x 3.15 = $945
Part c
If AT&T launches a new program that reduces the churn rate to 1.05, the CLV would be increased as follows:
New CLV = $300 x (0.87/(1 + 0.12 - 0.87)) = $300 x (0.87/0.25) = $300 x 3.48 = $1,044
Question 2
Gupta et al in ‘Modeling Customer Lifetime Value’ indicate that CLV is an important marketing metric because it can be used to manage and measure the success of a business. It can be used to help a business make more informed decisions in the area of marketing and in maximizing shareholder value. In fact, it can be used to identify profitable customers (Gupta et al 140). By segmenting the market revenue can be increased and therefore the value of the business will increase.
Work Cited
Gupta, S., D Hanssens, B Hardie, W Kahn, V Kumar, N Lin, and N.R.S Sriram. Modeling Customer Lifetime Value. Journal of Service Research, 9(2): p. 139-55. 2006: Print Read More
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