A retailer spends $75 to acquire a new customer by offering $75 cash to the customer if they sign up for a loyalty program. There are no costs to the customerfor signing up to the loyalty program. The retailer provides the new customer with a 10% cash rebate on all money spent by the customer in the first year. The retailer has found that the average life of a customer is 5 years. The retailer also noticed that there is a gradual decline in the revenue from each customer over the 5 years.
The average annual revenue produced by each customer for the five years starting with the first year and ending with the last year is as follows: $400, $320, $240, $125, $40. Interest rates remain at 4% for the 5 years.
Calculate the Customer Life Time Value using the NPV approach. Use an annual basis for your calculations. Assume 100% customer retention for all time periods.
T
NPV = ? (Ct)rt__
t = 0 (1 + d)t
C = cash flow (i.e. however one defines cash flow, e.g. revenue, gross profit, net profit…)
t = time
d = discount rate
r = retention rate (or probability of return)