Problem 1. Calculate the Gross Margin per Year (GMY): GMY = Revenue per Year * Contribution Margin - Retention Cost Revenue per Year = Revenue per Order * Number of Orders per Year = $760 * 10 = $7600 GMY = $7600 * 33% - $428 = $2512 - $428 = $2084
Problem 2. Calculate the Average Lifespan of a Customer (ALC): ALC = 1 / (1 - Retention Rate) = 1 / (1 - 87%) = 7.69 years (rounded to two decimal places for calculation purposes)
Problem 3. Calculate the Gross Margin per Customer Lifespan (GMCL): GMCL = GMY * ALC = $2084 * 7.69 = $16025.56
Problem 4. Calculate the Customer Acquisition Cost (CAC): CAC = $920
Problem 5. Finally, calculate the Customer Lifetime Value (CLV): CLV = GMCL - CAC = $16025.56 - $920 = $15105.56 However, we need to discount this value to the present using the discount rate. The formula for the present value of an annuity (which is what the GMCL represents) is: PV = C * [(1 - (1 + r)^-n) / r] where C is the cash flow per period (in this case, the GMY), r is the discount rate, and n is the number of periods