MCS, L AY2018/2019

Customer lifetime value exercises

CASE I
Andrea has just moved to Milan for a project with two-year work contract. Immediately he
became a regular customer at the bar next to his office. Usually he goes there once a week and
has 2 drinks. Average price of a drink is 7€ and the bar’s gross margin is 70%.

Assume 4 weeks per month, and monthly discount rate of 1%.

Questions
1. What is Andrea’s CLV to the bar?

2. After the two-year project, Andrea decides to be permanently transferred to Milan office. Now,
if he continues his habit of going to the same bar, what is his CLV to the bar?

3. After two years being here, Andrea would like to explore new places and probably he would not
go to the same bar as regularly as before. If he has a 95% chance of going to the same bar in the
following month, how long the bar can expect Andrea to be its customer? What would be his CLV?

4. How about 90% and 80% chance of going back, what would be Andrea’s expected life time as a
customer and his CLV?
MCS, L AY2018/2019

Case II

A TelCo operator which currently has some 2,5 million customers in Italy launches its new offer:
- Price: 20€ / month
- Margin on full price: 40%
- Contract length: 23 months
- 20% discount on the first two months
- Last month for free, if the contract is still active
The expected retention rate varies across the duration of the contract:
- From beginning to 6th month: 99%
- 7th to 12th month: 95%
- 13th to 18th month: 90%
- 19th to 21st month: 92%
- 22nd month: 98%

In case of anticipated interruption by the customer, he/she will have to pay back the 50% of the
remaining fees on full price (including the 23rd month).

The company also has a contact center for customer service. It is in outsourcing and it costs 3,5€ /
call. Based on estimation of past data, the probability of receiving a call by customers under such
contract is estimated as follows:
- From beginning to 6th month: 1,5%
- 7th to 15th month: 0,2%
- After 15th month: 0,4%

Assume monthly discount rate is 1%.

Question
1. What is the CLV of an acquired customer?

2. The company is planning a campaign to support the launch of this new offer. There are two
possible segments:
a) Segment A: composed by 100.000 customers. Cost per contact is 10€. Response likelihood
is 20%.
b) Segment B: composed by 300.000 customers. Cost per contact is 8€. Response likelihood is
15%.
Which segment would you choose to be the target of the campaign?