Customer Lifetime Value Exercise

Tess is the development manager for an art museum in Boston. She is in the middle of a large campaign to raise $50 million for a building expansion project. Her development budget was tight and Tess knew that she needed to attract and acquire the right kind of donor to the campaign. She was trying to decide which (group) of donor to cultivate.

One choice based on looking at her STP approach and associated analysis was Dorothy. Dorothy is very interested in art. She desires to visit an art museum at least one weekend day a month to enjoy the regular collection, and the special exhibitions. This (group) of customer(s) was likely to give in smaller increments, typically about $500 per year, but based on analysis, has a retention rate of 60%.

The other choice was Pauline. Pauline is interested in art as a way to communicate her social standing. She desires to visit an art museum during special events held every few months where she can feel special and socialize/network with others. This (group) of customer(s) was likely to give big gifts, on average about $5,000 per year, but tend to contribute to other causes as well. Based on analysis, this customer (group) has a typical retention rate of 30%.

Dorothy is easier to acquire as a donor. Tess will invite her to a black tie event associated with a special exhibition which cost the museum $100 per person, and then she would likely become a donor.

Acquiring Pauline as a donor requires more expense and effort. Tess will personally cultivate her with dinners, special tours for her and her friends with curators, and at exclusive special events (such as the dedication of a donor wall) that will acknowledge her contribution. In total, her acquisition as a donor will cost the museum $4,500 per person.

In addition, for every donation dollar received from a customer, Tess spends $0.15 in variable costs.

Given her limited development budget, Tess would like to use her resources wisely and acquire the right donor (group). Assuming a 5 year lifetime period and 12 percent discount rate, which consumer (group) is more profitable? Which other factors should Tess consider?

Please calculate the customer lifetime value for each of these and decide which group is more profitable to target