CLTV Calculation for the Calyx & Corolla Case

(1) Net acquisition cost of a new customer.

Note: - Cost of one catalog to each prospect (assume the prospects are from rented mailing lists) - Response rate (take the midpoint of the response rate range provided in the case); Total acquisition cost $0.40 (average cost of reaching one prospect: 0.32 catalog+0.08mailing list rental) / 1.5% (response rate) = 26.7 Average contribution of one order/customer

Average order amount - COGs - freight - handling = $45 (midpoint of $30-60 ) - 45*20% - 9 - 5 = $22

Net acquisition cost of a new customer

26.7-22 = 4.7 (2) Discounted net value each customer can bring in their lifetime. (Note: Assume that each of the customers acquired stays with Calyx & Corolla for 5 years). First, figure out the cost of retaining each customer (i.e., the cost of sending catalogs to each customer in a year). Second, figure out the contribution from the orders each customer place in a year. Finally, figure out the net value and then discounted the net value. The discounted net value of one customer over the 5 years is: (Year1 net value) / (1 + i) + (Year2 net value ) / (1 + i)2 + …… + (Year5 net value) / (1 + i)5. (Note: Assume the discount rate i = 10%)

Year 1 Year 2 Year 3 Year 4 Year 5

Cost 3.8 (0.32*12)

3.8 3.8 3.8 3.8

Contribution

19.8 (22*7.5%*12) (assume a response rate of 7.5%)

19.8 19.8 19.8 19.8

Net Value 16 16 16 16 16

Discounted Net Value

(16/1.1) (16/1.1^2) (16/1.1^3) (16/1.1^4) (16/1.1^5)

Total Discounted net value (across five years) = 60.7

(3) CLTV of a Calyx & Corolla customer

Total Discounted Net Value – Net Acquisition Cost = 60.7-4.7 = 56