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 would BEST estimate for the lifetime value of an average customer using the simplified customer lifetime value (CLV) equation?

Answer 1

Answer:

$1,250

Explanation:

The computation is shown below:

Customer life time value = Gross contribution margin × (yearly retention rate ÷ 1 + yearly discount rate - yearly retention rate)

= $500 × (0.8 ÷ 1 + 0.12 - 0.80)

= $400 ÷ 0.32

= $1,250

The gross contribution margin would be

= $1,000 - $500

= $500

hence, the estimate for the lifetime value os $1,250