Question

Comcast, Inc. (the cable tv company) is trying to determine the Lifetime Value of its customers. Here are some facts related to Comcast customers: - A study of historical sales data reveals that the average customer brings in about $2500 of sales revenues each year. - A study of historical cost data reveals that the average cost to service and retain a customer is about $700 per year. - Comcast spends about $500 to acquire a new customer, on average. - Comcast retains approximately 75% of its customers from one year to the next. - Comcast's discount rate is 7%. --

a. Calculate the Lifetime Value of a Comcast customer using the infinite time horizon version of the CLV formula.

b. How does your answer to a. change if year-to-year customer retention drops to 50% (and everything else stays the same)? c. What is the maximum amount Comcast can spend to acquire a customer and still maintain a positive Customer Lifetime Value (CLV)? (use the original assumptions above and ignore the fact that Comcast currently spends $500 to acquire a customer)

Answer 1

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Given,

Average sales revenue = $2,500
Average cost of service = $700
Customer discount = 7%
Retention Ratio = 75%
Customer Acquisition cost = $500

Part a:

Margin per period = (Average sales revenue - Average cost of service) - Acquisition cost

= $2,500 - $700 - $500

                             = $1,300

CLV = Margin per period × ( (1 + d) / (1+d-r))

= $1,300 × ( (1 + 0.07) / (1+0.07 - 0.75))

= $1,300 × ( 1.07 / 0.32)

= $4,346.875

Part b:

Retention ratio is 50%

Margin per period = (Average sales revenue - Average cost of service) - Acquisition cost

                             = $2,500 - $700 - $500

                             = $1,300

CLV = Margin per period × ( (1 + d) / (1+d-r))

= $1,300 × ( (1 + 0.07) / (1+0.07 - 0.50))

= $1,300 × ( 1.07 / 0.57)

= $2,440.35

Part c:

The maximum amount that can be spent to acquire a customer is average sales minus Average Cost,

that is $1,800($2,500 - $700).

At that point, CLV is also positive but after $1,800, CLV will be negative.

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