Problem:

Michelle is the director of marketing for M&J Jewelry, a direct-mail jewelry business that sells high-end costume jewelry via monthly catalogs. She wants to better understand the lifetime value of the customers who buy jewelry from M&J so that she can determine whether she should implement specific marketing initiatives aimed at increasing the retention rate of some portion of her customer base. She asks the head of her accounting department for some data to support her CLV analysis and he gives her the following information:

• The average catalog customer spends $250 per purchase.
• The margin on a sale is 40%.
• The average customer buys from the catalog 4 times per year.
• The average annual cost of mailing the catalogs is $9.60 per prospect per year.
• The response rate for the catalog (i.e. the rate of customer acquisition) is 2%.
• The retention rate is 65% year over year.
• Our normal annual discount factor is 10%.

Required:

Question 1: What is the cost of customer acquisition (assume that acquisition occurs BEFORE any transaction actually occurs)?

Question 2: What is the annual margin for a customer?

Question 3: What is the expected lifetime of a customer?

Question 4: Calculate the CLV of a customer assuming no annual discount factor.

Question 5: Calculate the CLV of a customer including the discount factor.

Question 6: As a marketer, what could you do to improve the CLV of a customer?

Note: Be sure to show how you arrived at your answer.