Question

Cool Beans is a locally owned coffeeshop that competes with two large coffee chains, PlanetEuro and Frothies. Alicia, the owner, is considering two different marketing promotions and thinks that CLV analysis will help her decide the best course of action. An average specialty coffee drink sells for $3.40 and has a margin of 65%. One promotion is providing loyalty cards to her regular customers that would give them one free specialty coffee drink after 10 regular purchases. Alicia estimates that this will increase the frequency of their purchases by 13%. Currently, her customers average buying 2 specialty drinks per week. The second promotion is targeted at new customers. She would offer a free specialty drink to incoming college freshmen by providing a coupon with their orientation packages. Because of her location near the college, she expects that 550 students will come to Cool Beans for a free trial. Of those, she anticipates that 18% will become regular customers who will purchase at least one specialty drink each week. The cost of printing and distributing the coupons is $115.
What is the CLV of a customer over the time horizon of one year prior to introduction of the loyalty program?

Answer 1

Answer:

Cool Beans

The CLV of a customer over the time horizon of one year prior to the introduction of the loyalty program is:

=  $353.60

Explanation:

a) Data and Calculations:

Price of average specialty coffee drink = $3.40

Profit Margin = 65%

Profit Margin = $2.21 ($3.40 * 65%) per drink

Average drinks per customer per week = 2

Total drinks in a year = 104 (2 * 52)

Profit Margin in a year = $229.84 ($2.21 * 104)

Therefore, the Customer Lifetime Value = Gross Revenue

= $3.40 * 2 * 52 = $353.60

b)  The Customer Lifetime Value (CLV) is the average purchase value multiplied by the average purchase frequency rate.  In this customer's case, the CLV is calculated for only one year and not actually for a lifetime.