Question

Eastern Motors Auto Dealership wanted to estimate the average CLV over a 5 year time horizon of a customer who purchases a new vehicle. The average vehicle sells for $27,100 and has a margin of 10%. Based on historical averages, 74% of people buying a new vehicle at Eastern will return for service 11 times over the next 5 years. Though it varies considerably, Eastern generates approximately $132 in margin on each service visit after accounting for parts and direct labor costs.

1. Not including service, what is the average dollar margin for each new vehicle sold?

2. What is the 5 year value of the service component of a customer who returns to Eastern Motors for servicing their vehicle?

3. What is the estimated 5 year value of the service component of a customer who purchases a new vehicle at Eastern Motors?

4. What is the total estimated CLV over a 5 year time horizon for someone who purchases a new vehicle at Eastern Motors?

5. What would be the value of a service loyalty program that increased the average number of visits by 2 (over 5 years) and increased the probability that a new vehicle purchaser would return for service by 5 percentage points (e.g. from 75% to 80%) on a per customer basis?

Answer 1

1. Average dollar margin for each vehicle sold :

$27100 being the sales value includes 10% margin. Assuming this 10% margin is on cost, $27100 is value equivalent to 110. Finding out value equal to 100 ( as 100+ 10% of 100 = 110)

(27100/110)*100 = $24636.36

Margin = 27100.00 -24636.36 = $ 2463.64

2. 5 year value of the service component of a customer who returns to Eastern Motors for servicing their vehicle :

CLV = average value of a purchase X number of times the customer will buy upto the average length of the customer relationship

= $132 * 11 = $ 1452

3. The estimated 5 year value of the service component of a customer who purchases a new vehicle at Eastern Motors :

= CLV for service component who returns * historical average representing the customer who will return post buying new vehicle from eastern motors

= $1452 * 74%

= $1074.48

4. The total estimated CLV over a 5 year time horizon for someone who purchases a new vehicle at Eastern Motors

= Value of purchase of vehicle + estimated 5 year value of the service component of a customer who purchases a new vehicle at Eastern Motors

= $ 27100.00 + $ 1074.48

= $ 28174.48

5. Value of a service loyalty program that increased the average number of visits by 2 (over 5 years) and increased the probability that a new vehicle purchaser would return for service by 5 percentage points (e.g. from 75% to 80%) on a per customer basis :

= Incremental Value Eastern motors is getting from such loyalty program

= ($132 * 11) * 5% = $72.60