A cable company spends, on average, $ 600 to acquire a customer. Annual maintena
ID: 2820603 • Letter: A
Question
A cable company spends, on average, $ 600 to acquire a customer. Annual maintenance costs per customer are $ 45. Annual record-keeping and billing costs are $ 30 per customer. While the price of the basic service to customers is $ 30/month, 40% of customers buys the premium package at $ 50/month and 10% buy the superpremium package at $ 80/month. Over time, 80% of all customers remains with the company in the long run. The firm uses a discount rate of 8%. What is the average CLV for all customers?
Explanation / Answer
The given formula for CLV is:
CLV = m * r / (1+d-r) - AC(Acquisition Costs)
where m is average margin per customer (the profit the we make per customer after reducing variable costs)
Since 40% of customer pays $50/month and 10% pay $80 per month, the remaining 50% pay $30 per month
Net revenue per month = 0.4*50+0.1*80+0.5*30 = $43/month
Net revenue per year = 43*12 = $516
Net margin (m) = $516 - $45-$30 = $441
retention ratio (r) = 80% = 0.8
discounbt rate (d) = 8% = 0.08
Acquisition cost (AC) =600
CLV = 441* 0.8/(1+0.08-0.8) - 600
CLV = 1,260 - 600 = 660
Average CLV for all cutomers = $660
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.