Problem
Friendly Market's customers visit the store 1.2 times per week on average. The average customer invoice is $40, on which the store makes a 5% contribution margin. Customers are loyal but there is a churn rate of 10% per year. When discounting cash flows, managers assume the discount factor is 10% per year.
I. What is the weekly margin obtained from a typical customer?
II. What is the yearly margin obtained from a typical customer?
III. What is the total discounted margin obtained over the lifetime of a typical customer? (use the CLV formula method)
IV. Now calculate the CLV using the excel method. The churn rate remains 10% and the discount factor remains .1. Assume a five year time horizon. For simplicity, discount the cash flows on a yearly basis and do not discount the first year cash flow. To clarify, you will have cashflows from years 0, 1, 2, 3 and 4 and you will not discount the cashflow or apply the churn rate to year 0. What is the total discounted margin obtained over the lifetime of a typical customer? Please report the CLV using the excel method. Please show your work by listing how you would calculate the cashflow from year 1.
V. If a return on investment of 10% is required over the lifetime of the customer, what is the maximum Friendly Market should pay to acquire a new customer? To answer this question, use the CLV answer you found in question 3c (using the formula method)
VI. What is the minimum number of new customers required to justify a college sports sponsorship campaign costing $100,000 to achieve 20% return on investment over the lifetime of a typical customer? Again, use the CLV found in question III using the formula method.