Problem #$2-1$:

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

purchase price is $$70$ per visit, the frequency of repurchase is $12$ times per year, the

contribution margin is $20\%,$ and the average customer defection rate is $25\%?$ If a continuous

improvement goal is set of a $20\%$ defection rate next year and $15\%$ two years from now, what

are the revised VLCs over their average buying life?

$***************************************************$

Solution #$2-1$:

We can use the logic of the equation: VLC $=($P$)($CM$)($RF$)($BLC$),$ where P $=$ the revenue per

unit, CM $=$ contribution margin to profit and overhead expressed as a fraction $($i$.$e$.,0\mathrm{.}45,0\mathrm{.}5,$ and

so on$),$ RF $=$ repurchase frequency $=1/($years or fraction of years between purchases$)$; that is$,$

$1/0\mathrm{.}5=2$ if repurchased every $6$ months, $1/2$ if every $2$ years, and so on$,$ BLC $=$ buyer$$s life cycle,

computed as $1/$defection rate, expressed as a fraction $(1/0\mathrm{.}2=5$ years, $1/0\mathrm{.}1=10$ years, and so

on$).$ Applying this to the data, we have

VLC $=($P$)($CM$)($RF$)($BLC$)=($$$70)(\mathrm{.}20)(12)(4)=$ $$672$

VLC $=($P$)($CM$)($RF$)($BLC$)=($$$70)(\mathrm{.}20)(12)(5)=$ $$840$

VLC $=($P$)($CM$)($RF$)($BLC$)=($$$70)(\mathrm{.}20)(12)(6\mathrm{.}67)=$ $$1,121$

The economic advantage of reducing the customer defection rate from $25\%$ to $20\%$ to $15\%$ is

evident, and when multiplied by the number of customers in the market segment can be

substantial. Also, note the importance of the high repurchase frequency $$ every month.Problem #$2-1$:

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

purchase price is $$70$ per visit, the frequency of repurchase is $12$ times per year, the

contribution margin is $20\%,$ and the average customer defection rate is $25\%?$ If a continuous

improvement goal is set of a $20\%$ defection rate next year and $15\%$ two years from now, what

are the revised VLCs over their average buying life?

$***************************************************$

Solution #$2-1$:

We can use the logic of the equation: VLC $=($P$)($CM$)($RF$)($BLC$),$ where P $=$ the revenue per

unit, CM $=$ contribution margin to profit and overhead expressed as a fraction $($i$.$e$.,0\mathrm{.}45,0\mathrm{.}5,$ and

so on$),$ RF $=$ repurchase frequency $=1/($years or fraction of years between purchases$)$; that is$,$

$1/0\mathrm{.}5=2$ if repurchased every $6$ months, $1/2$ if every $2$ years, and so on$,$ BLC $=$ buyer$$s life cycle,

computed as $1/$defection rate, expressed as a fraction $(1/0\mathrm{.}2=5$ years, $1/0\mathrm{.}1=10$ years, and so

on$).$ Applying this to the data, we have

VLC $=($P$)($CM$)($RF$)($BLC$)=($$$70)(\mathrm{.}20)(12)(4)=$ $$672$

VLC $=($P$)($CM$)($RF$)($BLC$)=($$$70)(\mathrm{.}20)(12)(5)=$ $$840$

VLC $=($P$)($CM$)($RF$)($BLC$)=($$$70)(\mathrm{.}20)(12)(6\mathrm{.}67)=$ $$1,121$

The economic advantage of reducing the customer defection rate from $25\%$ to $20\%$ to $15\%$ is

evident, and when multiplied by the number of customers in the market segment can be

substantial. Also, note the importance of the high repurchase frequency $$ every month.