As a product manager you are reviewing the Customer Lifetime Value (CLV) of 1000 newly acquired customers over 3 year period. The CLV was calculated using historical data from similar products as a basis of assumption. Below are the assumptions for the CLV calculation:

i- Customer retention rate is expected to be 90% in the 1st year, 80% in the 2nd year and 70% in the 3rd year.

ii- On average each customer purchases twice in the 1st year, 3 times in the 2nd year, 4 times in the 3rd year.

iii- Average spending per person per transaction is $20 in the 1st year, $30 in the 2nd year, and $40 in the 3rd year.

iv- Operating cost per customer is expected to be $40 in the 1st year, $30 in the 2nd year, and $30 in the 3rd year.

v- Cost to acquire the 1000 new customers was $20,000.

You are looking for ways to improve the CLV and are considering introducing a loyalty program to improve retention rate. Additional cost for promoting and maintaining the loyalty program is estimated $10 per customer per year. The loyalty program is expected to improve retention rate to 95% in the 1st year, 85% in the 2nd year and 75% in the 3rd year. The loyalty program is also expected to increase the average spending per customer per transaction by 10%. Discount rate is assumed to be 7%.

a. Calculate the Customer Lifetime Value (initially and after implementing the proposed loyalty program) over the 3-year period. Show your calculation.

b. Based on your calculation in question (a), should the management implement the proposed loyalty program? Explain your answer.

c. What other CRM retention strategies can be implemented by the management to improve the CLV? Your answer should explain at least 2 relevant retention strategies.

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P1 Intially Question analyss ReAention Customer Retren Be Fore ist yr 901... View the full answer