Iscussion questions-Customer Lifetime Value
(1) Use the Customer Lifetime Value (CLV or LTV) formulas described in the a?Useful Marketing Metricsa? note to answer the following questions. (These formulas are slightly different from those on page 132 in the textbook; do not use the formulas in the textbook.)
Suppose that the average cost for AT&T to acquire a new customer is $370 (including handset subsidy, sales force commission, advertising and/or direct mails expenses). Once acquired, a customer pays about $60 a month. The average monthly cost to serve a customer is $35. The monthly churn rate is 1.22%. Assume a 1% monthly interest rate.
a. How long does it take AT&T to break-even on a new customer?
b. What is the customer lifetime value for an average AT&T customer? (You can use the infinite-time-horizon formula.)
c. Suppose AT&T plans to launch a customer satisfaction improvement program through better network coverage and complimentary services (such as free Wi-Fi in Barnes and Noble bookstores). Marketing research shows that the new program can reduce the monthly churn rate to 1.05%. How would the CLV change as a result of the new program?
(2) Why is CLV an important marketing metric? In what areas can it help a company make more informed decisions?