Question

1. Sprint charges its current customers an average of $55 per month. It costs Sprint $4.50 per month to serve these customers. It also spends $3 per customer per month to keep these customers loyal. Over the last few years Sprint has been able to retain 80% of its customers. Assume a discount rate of 5% annually.

1. Calculate Sprint’s customer lifetime value of its current customers. [2]

2. Sprint is willing to spend $320M in advertising to 10 million viewers, and $375M in buying out contracts for T-Mobile and AT&T customers. They expect that at least 10% of those in the targeted group will switch. In addition to cutting rates of these potential customers, leading to an average monthly price of $40 per month per customer. These customers would also pay $50 in activation fees. Calculate the CLV for these customers at the same discount rate, retention spending, and variable cost, however the retention rate is expected to be 88% for these new customers. (hint: Initial margin = activation fee) [3]

CLV=Initial margin+ Mr/(1+d-r)-AC

3. What is the minimum acquisition rate they would need to achieve for this promotion to be justified (breakeven acquisition rate)? [2]

  Breakeven Acquisition Rate= Acquisition Spending/CLV

4. Assume that Sprint they fell short of the 10% goal, and got 7.5% of the targeted customers to switch, and year-to-year Sprint can increase their margins from these customers by 6%. Out of the buyout money, they paid an average of $125 in early termination fees per customer. Calculate their new CLV using the acquisition cost. (Hint: use the formula with g. AC = [advertising/number of people who switched] + average buyout cost). [3]

CLV= Initial + M x r / (1+d-r[1+g]) - AC

Answer 1

A - CUSTOMER LIFETIME VALUE

1. Sprint charges its current customers an average of $55 per month.
2. Costs Sprint $4.50 per month to serve these customers
3. spends $3 per customer per month to keep these customers loyal
4. Over the last few years Sprint has been able to retain 80% of its customers ( 55 * 80% = 44 )
5. discount 5% per annum.[55 * 5%]

CLV = gross contribution per customer {yearly retention rate / 1 + yearly discount rate - yearly retention rate }

= 55 * [44 / 1+2.75 - 44 ]

= 55 * [44/40.25]

= 60.115

B. Sprint is willing to spend $320M in advertising to 10 million viewers, and $375M in buying out contracts for T-Mobile and AT&T customers.

They expect that at least 10% of those in the targeted group will switch.

In addition to cutting rates of these potential customers, leading to an average monthly price of $40 per month per customer.

These customers would also pay $50 in activation fees.

Calculate the CLV for these customers at the same discount rate, retention spending, and variable cost, however the retention rate is expected to be 88% for these new customers. (hint: Initial margin = activation fee

CLV=Initial margin+ Mr/(1+d-r)-AC

= 50 +44 / [1 +2.5 - 44] - 5

= 50 + 1.086 - 5

= 40.086