Customer Lifetime Value Assignment
Due on 18th November at 1.30 pm
Instructions
1. The total points for this assignment is 10. The points for each question are shown
next to it. Please answer concisely and to the point.
2. Please show your calculations as well as the numerical answer for each question.
If you just write the answers without showing how you arrived at them, you may
not get the full points.
3. If your logic is correct, but the numerical calculations are wrong, you will get
partial credit.
Scenario 1
Professor Yoganarasimhan has decided to join a hiking club. The club charges a
membership fee of $25 per year. The membership entitles Professor Yoganarasimhan to
join 4 hikes a year, which she utilizes to the maximum. During a hike, she usually buys
some hiking equipment and a sports drink from the club. On average, she spends $50
during each hike with the club and the cost of providing the required products runs to
about $20 for the club. The club has a zero discount rate and loses about 30% of its
customers a year.
Answer the questions sequentially, and keep adding the new information given in each
question to the next one.
1. What is Professor Yoganarasimhan’s CLV for the club? (1 POINT)
2. As part of the promotion to get new members, the club conducted a free hike and
provided food, drinks, and equipment. The free hike attracted 10 hikers (one of
which is Professor Yoganarasimhan) and cost the club $250 to conduct. They also
send her flyers and mails that cost $6 a year. With these costs added in, what is
her new CLV? (1 POINT)
3. During a hike, Professor Yoganarasimhan meets the CEO of the club, and
mentions to him that zero discount rates are not reasonable, and that the market
discount rate is about 10%. Assuming the same costs described above, what is the
CLV that the CEO should assign to Professor Yoganarasimhan? (Assume the
same costs are same as that given in question 2.) (1 POINT)
4. After sharing this information, Professor Yoganarasimhan is so lost in thinking
about CLV that she slips and falls down during a difficult turn, which the hiking
guide didn’t warn her about. She is very upset and tells the club that she is leaving
unless she is compensated. What is the maximum amount the club should be
willing to pay out to retain Professor Yoganarasimhan? (Assume the same costs
and interest rate are same as that given in questions 2 and 3.) (1 POINT)
Scenario 2
5. A firm operating in a market with one another firm retain 55% of its customers
and acquires 90% of its competitor’s customers. What is the long run market
share of this firm? (2 POINTS)
Scenario 3
Assume interest rate is zero. You have identified two types of customers. Customers of
type A give you a per-period profit margin of $40. Your retention rate for type A
customers is .8. Customers of type B give you a per-period profit margin of $75. Your
retention rate for type B customers is .4.
6. What is the absolute CLV for type A consumers in the scenario described above?
(The absolute CLV ignores acquisition costs.) (1 POINT)
7. What is the absolute CLV for type B consumers in the scenario described above?
(The absolute CLV ignores acquisition costs.) (1 POINT)
8. Imagine you could run a marketing campaign targeting only type B customers to
enhance your relationship with them and boost the per-period profit margin to
$100? What is the maximum amount of money that you could spend on this
marketing campaign and have it earn you the same as not running the campaign
(in which case your per-period profit stays $75). Assume there are 10 type B
customers. (2 POINTS)
