Chapter 2: VLC

Assume that a customer in the small contractor target market segment buys an electric drill on average every five years (or every 0.2 year) for $100, when the gross margin on the drill averages 30 percent. The data has been collected in the Microsoft Excel Online file below. Use spreadsheet and perform the required analysis to answer the questions below.

1. What is the value of a loyal customer (VLC) if the customer retention rate is 50 percent? Round your answer to the nearest cent.

$

2. What is the value of a loyal customer (VLC) if the customer retention rate increases to 75 percent? Round your answer to the nearest cent.

$

3. What is a 1 percent change in market share worth to the manufacturer if it represents 100,000 customers? Round your answers to the nearest dollar.

50 percent customer retention rate case: $

75 percent customer retention rate case: $

4. What do you conclude?

If customer retention can be increased from 50 to 75 percent through better value chain performance, the economic payoff is (doubled or quadrupled)

B9 B D E E A Value of a Loyal Customer 2 CO OU AWN Revenue per unit Percent contribution margin to profit and overhead Repurchase frequency (purchases/year) Customer retention rate Number of customers representing 1 percent market share $100.00 30% 0.2 0.5 100,000 7 Buyer's life cycle Formulas #N/A VLC Value of a 1 percent change in market share #N/A #N/A Customer retention rate 0.75 10 11 12 13 14 15 16 17 18 19 20 Buyer's life cycle #N/A VLC Value of a 1 percent change in market share #N/A #N/A