Question

Clear Vision Entertainment, Inc. is a digital satellite television provider that charges $27 per month for service. The company plans to increase marketing expenditures aimed at customer retention next year but wants to determine CLV before making this decision. Variable Costs before marketing are $9 per account per month. Per year, the company spends $37 per account in retention costs spread equally across the year. Clear Vision's annual attrition rate is 18% with a monthly discount rate of 1.7%.

A. What is the monthly contribution margin ($) per customer account (not including retention costs)?

B. What are the monthly marketing retention costs per customer account?

C. What is the monthly retention rate?

D. What is Clear Vision's CLV per new customer?

E. If, due to improved customer service, the annual attrition rate reached 4%, what would be the new monthly retention rate?

F. If Clear Vision's annual attrition rate were to decline to 4% through improved customer service, what would be the increase in CLV?

Please show handwritten work with formulas. I understand that monthly contribution would be $27 - $9 = $18 and the month marketing retention cost per customer is $37 / 12 = $3.08. Also, the monthly retention rate would be

(1 - 18%)^(1/12) = 0.9836. Please help me have a better understanding of CLV. Thank you very much.

Answer 1

A)  monthly contribution margin ($) per customer account (not including retention costs

C = S-V where, C= contribution, S= sale value, V= variable cost

Sale value here = $27 - $37/12(monthly retention cost)

= $24

Now C= S-V

= $24-$9

= $15

B) Yearly retention cost per customer = $37

Monthly retention cost per customer = $37/12 =$3.08 or $3

C)

annual attrition rate is 18%, so monthly attrition rate is 18%/12 = 1.5%

Retention rate = (100-1.5)%

= 98.5%

D)

Clear Vision's CLV per new customer will be,

monthly contribution margin ($) per customer account as calculated in problem A - ( monthly contribution margin ($) per customer account as calculated in problem A multiplied by discount rate)

= $15 - ($15*1.7%)

= $15 - $0.25

= $14.75