Question

Eastern Motors Auto Dealership wanted to estimate the average CLV over a 5 year time horizon of a customer who purchases a new vehicle. The average vehicle sells for $25,800 and has a margin of 10%. Based on historical averages, 74% of people buying a new vehicle at Eastern will return for service 12 times over the next 5 years. Though it varies considerably, Eastern generates approximately $142 in margin on each service visit after accounting for parts and direct labor costs.

1. Not including service, what is the average dollar margin for each new vehicle sold?

2. What is the 5 year value of the service component of a customer who returns to Eastern Motors for servicing their vehicle?

3. What is the estimated 5 year value of the service component of a customer who purchases a new vehicle at Eastern Motors?

4. What is the total estimated CLV over a 5 year time horizon for someone who purchases a new vehicle at Eastern Motors?

5. What would be the value of a service loyalty program that increased the average number of visits by 2 (over 5 years) and increased the probability that a new vehicle purchaser would return for service by 5 percentage points (e.g. from 75% to 80%) on a per customer basis?

I have the answers. I would just like the work to be shown in order to fully understand it. Thank you so much.

Answer 1

Eastern motor auto dealership wanted to estimate the average CLV over a 5 year time Horizon of a customer who purchases a new vehicle the average vehicle sales for $ 25800 and has a margin of 10%.

Average selling price of a car = $ 25800

Customer get margin on each vehicle sold = 10%

1) so the dollar margin in each car = $ 25800*10/100 = $2580.

The gross profit ratio has been associated with the selling price of the product so the service margin is not a calculated.

2) margin on each service visits = $142.

Number of times service over next 5 year = 12 time.

So the 5 year value of a service component of a customer

= 12 times of a margin on each service visit

= 12 * $142 = $1704.

3) for 74% the 5 year value of a service component of a customer who returned Eastern motor for a service their vehicle is $1704.

So the value of service component who purchase a new vehicle = value of a service component * probability that a customer will purchase a new vehicle

= $1704 * 0.74 = $ 1260.96.

4)For 74% of 5 year value of a service component of a customer = $1704.

The dollar margin in each car = $2580.

So the average CLV = 1704+0.74 * 2598 + 0.26 * 0

= $3626.52