question archive For the information given, rank the customers in terms of customer lifetime value
Subject:ManagementPrice:3.87 Bought7
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