Question 1

If we know that the average revenue of a particular manufacturing product is $75, frequency of repurchase is six times per year, contribution margin is 10%, and average customer defection rate is 25%:

(a) What is the average value of a loyal customer (VLC) in a target market segment?

To calculate the average value of a loyal customer (VLC) in a target market segment, we can use the formula, VLC = P x CM x RF x BLC.

P = revenue per unit = $75

CM = contribution margin = 10% = 0.1

RF = repurchase frequency per year = 6

BLC = buying life cycle of a customer as 1 / defection rate = 1 / 0.25 = 4 years

Plugging in these values, we get:

VLC = $75 x 0.1 x 6 x 4 = $180

so, how do we solve (b):

(b) Analyse how the value of a loyal customer (VLC) will change if the average customer defection rate varies between 15% and 40% (in increments of 5%) and the frequency of repurchase varies between 3, 4, 5, 6, 7, 8 and 9 times per year. Plot the graph or use Excel table to illustrate the impact of these assumptions on the VLC.