Question

You own a boutique store in Lahaina in Maui Island, Hawaii. Your store carries top-of-the-line specialty apparel and fosters a friendly and hospitable environment. You recently attended a marketing conference and listened to several presentations about customer lifetime value (CLV), the total amount a customer will spend from acquisition through the end of a relationship with a brand. You learned that the apparel industry is overhauling to become data-driven and customer-centric. Obtaining the CLV will help you to both decide who to target in advertisement and sales campaigns and assess how effective those campaigns will be at increasing customer value. Consequently, by using CLV metrics, you will be able to segment, profile, and target your customers, understand those customers’ characteristics, and pay them more attention to keep them loyal to your business. After returning home, you were interested in finding out your customer lifetime value so that you could develop promotional campaigns to improve your CLV. In order to calculate the CLV metric, a speaker at the marketing conference suggested that you use data from your company’s books related to four variables. The first variable is average value of sales per year. Your books showed that on average, the average value of sales per year was $750. The second variable is average customer acquisition cost. It includes promotion expenses, sales expenses, and your costs of attracting new customers during the first year, and it was found to be $400. The third variable, average customer retention rate, consists of the percentage of customers that will most probably buy from your store next year, and it was found to be 70 percent. The fourth variable, customer retention cost, is the cost of keeping customers loyal to your business, and it was found to be $100. Now that you have all the figures that you need, you take your notes out of your briefcase to check the formula that you learned at the marketing conference. The version of CLV they presented at the conference was: Customer lifetime value = [1 / (1 – Average customer retention rate)] X (Average value of sales per year) – (Average customer acquisition cost + Average customer retention cost). Using the worksheet below, you will need to input the data and create the formula in the required cell. Replace the variables in the formula above with the appropriate cell. 1. For the above data, what is the current CLV? -$511 $2,100 $511 $2,000 2. You were unhappy with your current CLV, so you conducted a promotional campaign that included advertisements in local newspapers, magazines and TV commercials to increase your customer value. The new data show that acquisition cost = $300, retention rate = 75 percent, retention cost = $150 and customer average value per year = $850. What is your new CLV? $2,950 -$461 $3,000 $461 3. Your new results still fell a little bit short of meeting your business goals. So, you were motivated to develop one more promotional campaign that included several channels of social media. Your updated data show that acquisition cost = $250, retention cost = $200, retention rate = 80 percent and customer average value per year = $2,500. What is your updated CLV? -$482 $12,050 $482 $15,020

4. You were happily surprised with the results. So, you decided to launch a new campaign to provide special attention to and take care of your clientele. You invite your customers to a private dinner party at a fancy French hotel restaurant in Lahaina with your products displayed in the background. After a few months, you notice that your data show that acquisition cost = $200, retention cost = $100, retention rate = 85 percent and customer average value per year = $1250. What is your new CLV?

$315

$8,033

-$315

-$8,033

5. As a marketing manager, which element of the formula do you think is the most important to obtaining a higher CLV?

customer retention rate

customer average value per year

customer acquisition cost

customer retention cost

Answer 1