For the information given, rank the customers in terms of customer lifetime value.

Avg. Annual Sales Avg. Profit Margin Expected Lifetime

Customer 1:            Customer 2:                 Customer 3:

$3,450 $2,000 $1,400

17 % 13% 32 %

8 years 6 years 10 years

Use a discount rate of 6 percent and treat the average sales figures as annuities. Should any of these customers be fired?

Answer:

Customer 1,

Average annual profit = average annual sales*average profit margin = 3450*17% = 586.5

NPV = 586.5*(((1+0.06)^8-1)/(0.06*(1+0.06)^8)) = 3642.04407

Customer 2,

Average annual profit = average annual sales*average profit margin = 2000*13% = 260

NPV = 260*(((1+0.06)^6-1)/(0.06*(1+0.06)^6)) = 1278.504325

Customer 3,

Average annual profit = average annual sales*average profit margin = 1400*32% = 448

NPV = 448*(((1+0.06)^10-1)/(0.06*(1+0.06)^10)) = 3297.318999

Ranking customers in order of their customer lifetime value => Customer 2, customer 3, customer 1

No customers should be fired