This assignment is based on a short case on Jupiter Gourmet Seafood (JGS) and involves estimating CLV for two customer segments. Please read the case and associated notes carefully. Jupiter Gourmet Seafood (JGS): Estimating CLV

JGS is an online specialty retailer of gourmet seafood that offers premium seafood at high prices. JGS ships its products to addresses in the U.S. in sealed containers filled with dry ice to preserve the seafood's freshness. JGS caters to two primary use cases: gourmet food enthusiasts ("foodies") who purchase regularly for their own consumption and to serve to guests at parties, and less frequent purchasers ("non-foodies") who visit the company's website primarily to purchase gifts around the holidays.

JGS is contemplating some expenditure to acquire new customers. They are thinking of purchasing a list of foodies from a list broker at $180 per name. The company is confident that based on its market knowledge, it would be able to put together a list of potential non-foodie customers also but will not have to pay for that list. The company plans to send each foodie and non-foodie customer a full-color catalog every month of a year, over the customer's lifetime as defined by the Marketing Manager.

JGS' Marketing Manager has decided that once the NPV of annual profit (i.e., the discounted value of a specific year's net profit estimated from a customer) dips below $120, complete attrition has effectively occurred, i.e., customer lifetime has ended, and that customer will not receive catalogs subsequently

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Each catalog costs the company $48 to produce and $30 to mail. The company's marketing team estimates that such lists generally result in a first-time response rate of approximately 7.5% for foodie customers, i.e., 7.5% of foodie customers who receive an unsolicited catalog in this manner will make a purchase in the first year. Non-foodie customers are estimated to exhibit a first-time response rate of 5%.

Also, foodie customers purchase more frequently than non-foodies, making three purchases a year, with an average order size of $6, 000; non-foodies make one large gift purchase annually with an average order size of $15, 000. Foodies also tend to remain customers longer, with an estimated annual retention rate (the percentage of customers who will continue to make purchases the next year) of 70% versus retention rate of 60% for non-foodies.

Lastly, because they view gourmet products like JGS' as staples, foodie customers tend to purchase slightly less expensive products than their non-foodie counterparts, who view JGS as

Note that this caveat implies that a specific customer who does not make a purchase in a year will no longer receive catalogs, because based on the caveat, that customer's lifetime will have ended (because the net profit from that customer in that year, and hence its NPV, will be 0, i.e., less than $120). In fact, for a customer to continue to received a catalog, a minimum annual purchase has to be made such that the NPV of the net profit from that purchase does not fall below $120.

special-occasion products on which to splurge. This behavior results in a margin to JGS of 60% for no-foodies versus a margin of 50% for foodies.

[Note: This margin is based on cost of goods sold (COGS) and regular operational expenses and does not include catalog-related costs.] JGS has approached you to help them estimate the CLV for each customer of the two segments over a period of 10 years and draw possible conclusions from those estimates, using an annual discount rate of 10%.

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Notes:

1. We do not know the number of customers on either list and so we have to estimated CLV for a typical individual customer on each list.

2. Note that this problem involves customer acquisition cost that needs to be factored into the computation of CLV. I give you a head start by computing this cost (see Appendix at the end of this document).

3. Assume that JGS acquires the list at the very beginning of a certain year (e.g., January 1, 2018) and starts mailing catalogs to people on these lists in the very first month of that year and continues to mail a catalog to qualified customers every month from then on. Note that given what the case states, every person on either list must receive a catalog every month for at least the first year.

4. In the first year of catalog mailing, we will assume that if a person on a mailing list becomes a customer, that person purchases JGS products, at the estimated rate stated in the case, before the end of that year.

5. It is important to separate year of mailing catalogs from the year used in CLV computations. We will count the year of mailing catalogs usually, i.e., starting with 1 as the first year. Here's what you need to do (following this sequence will help):

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1. Compute the estimated net profit per customer of each segment for the first and second year of mailing catalogs. Clearly show your work, including any formula you use. Use the pre-formatted.

2. Compute the estimated CLV per customer of each segment over the first two years of mailing catalogs. Clearly show your work, including any formula you use. Use the pre-formatted Individual Assignment Response Doc (attached with these instructions) to report this information.

3. Compute the estimated CLV for a customer from each segment for each year over a period of 10 years,

Clearly label all variables and show all formulas. Please use a single spreadsheet for the computations of both customer segments but separate these computations clearly. You can format the spreadsheet in your own way, but at a minimum, it must show the following for each segment:

(a) The estimated annual net profit for each of the 20 years.

(b) The NPV of the estimated annual net profit for each of the 10 years.

(c) The estimated CLV for a typical customer for each segment over the 10 years. Thus, the spreadsheet should show the CLV for the first year, the CLV over the first 2 years, the CLV over the first 3 years, etc., all the way to the CLV over 10 years. For instance, if I want to know what the estimated CLV is for a customer who stays a customer for 5 years or 7 years, I should be able to tell that from the spreadsheet. Please remember to separate the computations for the two segments.