Imagine that you currently work in the marketing department for a company that sells software to other
Question:
Imagine that you currently work in the marketing department for a company that sells software to other businesses that helps them conduct research surveys. All clients pay an annual subscription fee of $2,000 per year, which provides unlimited use of the software used to conduct these surveys.
Your company also offers an additional service of conducting research surveys on the client's behalf. This service includes recruiting participants, administering the survey, and analyzing the survey data. In addition to the annual $2000 subscription fee, this additional service costs $2,000 for each survey conducted. On average, clients utilize this additional service to host two surveys per year. While there are no major issues with the company's product, your company struggles to retain clients. On average, clients retain for two years.
Your director is concerned about the budget and how much is being allocated to marketing. Currently, 1 million dollars per year is being spent on advertising and other marketing-related activities, yet the company is recruiting an average of only 500 new clients per year. To present an accurate budget to your director, use the following formulae to compute Customer Lifetime Value (CLV) and Cost of Acquiring a Customer (CAC).
CLV (Customer Lifetime Value) = (Average Purchase Value) x (Purchases in a Single Year) x (Average Number of Years Retained)
CAC (Cost of Acquiring a Customer) = (Total number of dollars spent to acquire customers) / (Total number of customers acquired)
Draft an email to your director, outlining the value of the clients compared to the marketing investments. Use the concept of the Customer Lifetime Value (CLV) as support. Detail the following in your email:
- Determine the company's current Customer Lifetime Value (CLV) and Cost of Acquiring a Customer (CAC).
- Conclude by recommending whether or not the marketing spending and costs are within an acceptable range.
- Explain why the Customer Lifetime Value is important to consider for marketing investments, and how it supports your conclusion.
- Recommend ways to increase Customer Lifetime Value (CLV) from marketing perspective.
- Recommend improvements that can support the ratio between CAC and CLV.
- Explain how these improvements can influence these calculations.
Financial Management for Decision Makers
ISBN: 978-0138011604
2nd Canadian edition
Authors: Peter Atrill, Paul Hurley