question archive An internet service provider charges $19
An internet service provider charges $19
Subject:ArtsPrice:2.84 Bought3
An internet service provider charges $19.95 per month. If the firm
cuts retention spending from $6 to $3 annually, attrition is expected to go up 1% per month. Should they do it?
Variable = $1.50 per customer per month
Marketing spending is $6/year
Retention rate = .995%
M= 18.45
R = .50
d= .01
CLV = $1209
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If the new CLV is higher, we should do it. Otherwise, we should not.
New CLV:
$M = $1.50 = $18.45
$R = $3/12 = $0.25
r = 0.99
d = 0.01
CLV = [$M $R] x [(1 + d) / (1 + d - r)]
CLV = [$18.45 $0.25] x [1+.01)/( )]
CLV = [$18.2] x [50.5]
CLV = $919
The new CLV would be $919.
The new CLV is LOWER. The savings in retention spending is NOT worth the increased attrition. The firm should stick with the $6 retention spending. Since $919 is LESS than $1,209, the proposed change is not attractive.
