Question

Marketing

Adidas estimates it can persuade Ms. Cheryl to start purchasing Adidas shoes this year, and to continue purchasing them for the next two years, with likelihood decreasing by 20% yearly. Marketing activities to get her to start using Adidas shoes are estimated at $75, and she is expected to spend $150 on a pair of Adidas shoes yearly, with the variable costs for each pair of shoes being $75. Using a discount rate of 7.5%, what is her CLV to Adidas?

Answer 1

Customer Lifetime Value

CLV or customer lifetime value is the amount of value a customer contributes to a business over their lifetime – which starts with a new customer’s first purchase or contract and ends with the “moment of churn.”

In the above case following key points are to be noted:

1. Lifetime of customer= 2 years
2. CAC= $75
3. Purchase= $150
4. Discount rate= 7.5%
5. Loyalty= 80%

CLV= Average Gross Margin Per Customer Lifespan X (Retention / (1 + Rate Of Discount – Retention))

Average annual profit from Ms. Cheryl= 150 x 2 x 7.5

= 2250

CLV= Average Gross Margin Lifespan X (Retention / (1 + Rate Of Discount – Retention))

= 2250 x (.8/ (1+ 7.5-.8))

= 2250 x (.8/7.7)

= 2250 x 0.10

= 232