Exercise: Customer lifetime value & customer profitability over time

EUREDEN Group has launched a vast program to conquer new customers. The company has engaged with huge means in order to approach 250 middle size prospects and 20 key prospects in Europe. The CEO has fixed the following hypothesis concerning cost and profit generated by those prospects for the next 4 years.

HYPOTHESIS		KEY PROSPECTS	MIDDLE SIZE PROSPECTS
Number of contacted prospects		20	250
Customers conversion rate[1] (%)		30	10
Acquisition cost[2] ( / account)		1000	275
Gross Margin[3] (%) Y0 Y1 Y2 Y3		8 10 11 11	10 12 15 18
Turnover (/account) Y0 Y1 Y2 Y3		14500 15000 16000 18000	1500 1800 1900 2000
Marketing cost & Y0 after sales (/account) Y1 Y2 Y3		350 300 200 200	150 100 100 50
Discount rate %	10
Annual contribution		= Gross Margin - Marketing costs
Customers retention rate[4] Y0 (%) Y1 Y2 Y3		100 60 70 80		100 70 80 85
Net Present Value (NPV)	Contribution to margin/(1+discount rate)n(year)

1. From those figures, calculate the lifetime value for each customer group (key prospects vs. medium size prospects). In other words, we need to know which customer group is the most profitable over the full period of 4 years

2.What are your conclusions when comparing the two? What do you recommend

[1] The conversion rate measures the number of new customers out of the total number of approached propects

[2] The acquisition costs include all the costs related to customers acquisition (travels, time, phone calls, etc.)

[3] The gross margin measures the amount remaining after you subtract the cost of goods sold from net sales

[4] The retention rate measures the proportion of accounts that remain customers from a period to another