Question

An online apparel retailer groups its customers into two segments: premier and regular. There are 1000 customers of each type. The contribution margins of the two segments are $100 and $50, respectively. Each period, 30% of premier customers become regular customers and 10% are lost forever. Also, 10% of regular customers become premier customers and 40% are lost forever. Assuming a discount rate of 4%, what is the CLV or a single Premier and a single regular customer? Based on CLV, what are the net forecasted sales over a five year period?

Answer 1

CLV=Gross contributions/customer*(Yrly.Retention Rate/(1+yrly.Discount Rate-Yrly. Retention Rate)
	Premier	Regular
No.of customers	1000	1000
Contribution margin	100	50
Retention rate	(1-30%-10%+10%)=	(1-10%-40%+30%)=
	70%	80%
Discount rate	4%	4%
CLV using above formula	100*(70%/(1+4%-70%))=	50*(80%/(1+4%-80%))=
	205.8824	166.6667

							For Verification purpose
1	2	3=(Prev.val.in Col.3*(1-30%-10%))+(10%*Prev. val. In Col.4)	4=(Prev.val.in Col.4*(1-10%-40%))+(30%*Prev. val. In Col.3)	5=3*205.8824	6=4*166.6667		7=(10%*Prev.Col.3)+(40%*Prev.Col.4)	8=(Prev.col.3+Prev. Col.4)-Current col.7	Verification 9=8
				Net Sales Forecast			Lost customers	Bal.customers	Total cust.
Year		Premier	Regular	Premier	Regular				3+4
		1000	1000						2000
Yr.1		700	800	144118	133333		500	1500	1500
Yr.2		500	610	102941	101667		390	1110	1110
Yr.3		361	455	74324	75833		294	816	816
Yr.4		262	336	53962	55967		218	598	598
Yr.5		191	247	39291	41088		161	437	437
				ANSWER:
				Net Sales Forecast
			Year	Premier	Regular
			Yr.1	144118	133333
			Yr.2	102941	101667
			Yr.3	74324	75833
			Yr.4	53962	55967
			Yr.5	39291	41088