Question

Support SUPERTEL, a new Telecommunication company, in calculating the Lifetime Value per customer based on the following assumptions: Perform the necessary calculations (A THROUGH K NEEDS TO BE CALCULATED):

	Year 1	Year 2	Year 3	Year 4	Year 5
Revenue
A Customers	2,000
B Retention rate	30 %	40 %	55 %	65 %	70 %
C Average yearly sales	$250	$250	$250	$250	$250
D Total revenue
Costs
E Cost percentage	50 %	50 %	50 %	50 %	50 %
F Total costs
Profits
G Gross profit
H Discount rate	1	1.15
I NPV profit
J Cumulative NPV profit
K Lifetime value (NPV)

Answer 1

Ans   Year 1 Year 2 Year 3 Year 4 Year 5

a. Customer at Y0 2000

b. Retention Rate 30 40 55 65 70

c. Customer Retained 600 240 132 86 60

(2000*30%) (600*40%) (240*55) (132*65%) (86*70%)

d. Revenue Per

Customer $250   $250   $250   $250   $250

e. Revenues $150000 $60000 $33000 $21500 $15000

(e=c*d)  

f. Cost Percentage 50% 50% 50%   50% 50%   

g. Cost Incurred $75000 $30000 $16500 $10750 $7500

(g=e*f)

h.Gross Profit $ 75000 $30000 $16500 $10750 $7500

(h=e-g)

i. Discount Rate 1 1.15 ---- ---- -----

j. PV Factor 1/1.15 1/(1.15)^2 1/(1.15)^3 1/(1.15)^4

k. Pv Discounting `1 0.869 0.756 0.658 0.572   

l.Npv Profit $75000 $ 26070 $12474 $7074 $4290

(l=h*k)

m. Cumulative

Net Profit $75000 $101070 $113544 $120618 $124908

(75000+26070) (101070+12474) (113544+7074) (120618+4290)

o.Lifetime Value $75000 $26070 $12474 $7074 $4290

(NPV)

  Notes : 1. In the given case discounting is done by taking 15% rate as evident from Point H which Shows appreciation by 15 percent from 1 to 1.15 . Hence discounting is done of profits by taking 15 percent discount rate.

2. In the given case lifetime value as per point k in the question is equal to NPV profit in Point I