Question

A commercial cleaning company spends an average of $500 per year, per customer, in supplies, wages, and account maintenance. An average customer generates $1,000 in revenue per year. Assuming a discount rate of 12% and an annual retention rate of 80%, what is the best estimate for the lifetime value of an average customer using the simplified customer lifetime value (CLV) equation presented in the core reading?

Answer 1

Answer:

$1,250

Explanation:

Calculation for what is the best estimate for the lifetime value of an average customer using the simplified customer lifetime value (CLV) equation

Using this formula

Customer lifetime value (CLV) = r / (1 + i - r)

Let plug in the formula for

Customer lifetime value (CLV) = 0.8 / (1 + 0.12 - 0.8)

Customer lifetime value (CLV) = 2.5

Customer lifetime value (CLV) =($1,000-$5,00)× 2.5

Customer lifetime value (CLV) = $500 x 2.5

Customer lifetime value (CLV) = $1,250

Therefore the best estimate for the lifetime value of an average customer using the simplified customer lifetime value (CLV) equation will be $1,250