Question

Using his TightWad(R) database, Stu's MileageMiser has developed a new GPS based service to certify drivers for insurance discounts. He tracks their speeds, locations, and braking activity and delivers reports to insurance companies. January 1, 2009 he had 10,000 paying customers. Of that group, a year later, 9,900were still customers. He spent $24,000 on programs designed to keep current customers happy and $45,000on marketing to acquire new customers. His total number of customers on January 1, 2010 was 14,000. His revenue per customer is $55 per year and variable costs before marketing per customer are $5 per year.

1. What is Stu's annual churn rate? What is retention rate?

2. For current customers, what is annual average customer margin after deducting the average retention spending? Hint: You’ve already computed the average retention spending in the previous question.

3. What is Stu’s CLV for each customer if the annual discount rate is 1%? Hint: You’ve already computed margin ($) and retention rate (%) in the previous questions.

Answer 1

On January 1, 2009 we had 10,000 paying customers

Out of these a year later on January 1, 2010 we had 9,900 customers still with the company

Churn rate = Total customer left company at the end of the period / Total customers at the beginning of the period

Churn rate = (Total customer at the beginning - Total customer at the end of the period) / Total customers at the beginning of the period

Churn rate = (10.000 - 9,900) / 10,000

Churn rate = 0.01 or 1 %

Retention rate = 100% - Churn rate = 100% - 1% = 99%

Revenue per customer = $55 per year

Variable cost (without marketing expenses) per customer = $5 per year

Total expenses on retention programs for current customers = $24,000

Total marketing expense on retention per customer = $24,000 / 10,000 = $2.4 per year

Annual customer margin = Revenue per customer - (Variable cost per customer + Marketing cost per customer)

Annual customer margin = $55 - $5 - $2.4

Annual average customer margin = $47.6 (per customer)

Customer Lifetime value (CLV) = Gross margin * (Retention rate / [1+ Rate of discount – Retention rate])

CLV = $47.6 *(0.99 / [1+ 0.01 – 0.99])

CLV = $47.6 *(0.99 / 0.02)

CLV for each customer = $2,356.2