Question

Assume that a customer shops at a local grocery store spending an average of $200 a week, resulting a retailer profit of $10 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 lifespan. Also assume a 5 percent annual interest rate and no initial cost to acquire the customer.

Describe ways marketers can increase the lifetime value of a customer.

Answer 1

The average spending made in a week = $200 The customer spending by the customer during each year=200*52=10400 (one year = 52 weeks) Profit made during each year =52*$10=520 dollars Over a 10-year lifespan of shopping at this store, with a 5 percent annual interest rate and no initial cost to acquire, the customer will worth over $500. The formula to calculate net present value (NPV) is: NPV = Net cash flow = (1+ Interest rate)) Where, t=time of the cash flow N=Total customer lifetime Use a spreadsheet to calculate the customer lifetime value, as shown below: Note: If one is using discount tables or doing calculations manually, the answer can differ due to rounding of digits. А 0.05 Inflow 520 520 520 520 520 1 Rate of interest 2 Cash Flow 3 Period 1 4 Period 2 5 Period 3 6 Period 4 7 Period 5 8 Period 6 9 Period 7 10 Period 8 11 Period 9 12 Period 10 13 14 Customer lifetime value 520 =NPV(B1,B3:B12) 15

The results obtained are as follows: 0.05 Inflow 520 1 Rate of interest 2 Cash Flow 3 Period 1 4. Period 2 5 Period 3 6 Period 4 7 Period 5 8 Period 6 9 Period 7 10 Period 8 11 Period 9 12 Period 10 520 520 520 520 520 520 14 Customer lifetime value $4,015.30 The customer lifetime value is $4,015.30 The company can increase the revenue which is generated by the exchange of their products by focusing on the sale of the current products. The companies can adopt the strategy of cross selling and up selling. The other way of increasing the revenue is through the referral programs and by reducing the costs. The reduced costs will help in increasing the revenue and profit margins. Lastly, the company should focus on retaining its customer base by remaining loyal.