Question

Assume that a customer shops at a local grocery store spending an average of ​$150 a​ week, resulting in the retailer earning a ​$25 profit each week from this customer. Assuming the shopper visits the store all 52 weeks of the​ year, calculate the customer lifetime value if this shopper remains loyal over a​ 10-year life-span. Also assume a 4 percent annual interest rate and no initial cost to acquire the customer.

This customer yields ​$1300 per year in profits for this retailer. ​(Round to the nearest​ dollar.)

The customer lifetime is ​$_______. (Round to the nearest​ dollar.)

Answer 1

The customer’s live time value can be computed by adding discounted present value of annual profits. So it can be a fairly simple net present value calculation.

Life time value or NPV = C x PVIFA (r, n) – Initial cost of acquiring customer

C = Net annual cash flow or profit = $ 1,300

r = Rate of interest = 4 %

n = Life time of customer = 10 years

      NPV = $ 1,300 x PVIFA (4 %, 10) – $ 0

               = $ 1,300 x [(1-(1.04)^-10)/0.04]

               = $ 1,300 x [(1-0.675564168825799)/0.04]

               = $ 1,300 x (0.324435831174201/0.04)

               = $ 1,300 x 8.11089577935504

               = $ 10,544.16451316 or $ 10,544

The customer lifetime value is $ 10,544