MKT 370 Professor Zijun Tian

Spring 2024

Customer Lifetime Value (CLV) - Homework

The purpose of this exercise is to provide practice in calculating and applying customer
lifetime value. This is a group assignment. Please collaborate with your group members on
how to answer the questions. It is best to solve this assignment in a spreadsheet. You are to
upload both your explanation and the spreadsheet to Canvas.

1. Telecom

Ms. Grey works for Umbrella Cellular. She has been conducting a customer acquisition
program whereby Umbrella provides a free smartphone to all new customers. She wants to
know if this is worthwhile. She assumes the following:

• A newly acquired customer generates $100 in revenues in the first quarter.

• Customer revenues grow at a rate of 10% per quarter.
• Profit margins are 60% of revenues.
• The quarterly retention rate is 50%.
• Umbrella uses a 14% annual discount rate.

a. What is the lifetime value of a customer?

b. Currently, marketing costs incurred to acquire a customer are $100 per acquired
customer. In addition, Umbrella must pay the smartphone manufacturer $75 per phone that
it provides to the acquired customer for free. Can Umbrella afford this customer
acquisition program?

2. Playing Games

Mr. Ford is a mobile game developer. He’s developed a new game called MyPet whereby
customers raise their virtual pets on their phones. He will not charge customers to
download MyPet but he will charge for “add-ons” they can purchase in order to make their
pets happier (e.g., snacks, toys).

He decides to acquire customers by running a Facebook campaign. The campaign will

serve ads to Facebook users who have shown interest in mobile games. That is, these users
will be exposed to Mr. Ford’s ad. They then can click through on the ad and download the
game. The campaign cost $7 per thousand ads served (“exposures” or “impressions”).
This is called a $7 cost-per-thousand.

Mr. Ford runs this campaign. It generates 500,000 exposures and 50 users download the
game, thus becoming acquired customers. Mr. Ford finds they generate $20 per month in

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 add-on profits. He also finds he retains 80% of these customers per month (measured by
whether customers continued to play the game). He monitors these numbers for several
months and verifies that the $20 and 80% are constant over time.

Assume Mr. Ford uses a 6% annual discount rate for valuing the long term.

a. What is the lifetime value of a customer for the Facebook campaign? [HINT: Profit
contribution and retention rate are constant over time. This makes your calculation easier!]

!"#$% '(")*#
b. What is the return on investment (ROI) of the campaign (ROI= !"#$% +",# )?

c. Mr. Ford is thinking of reducing the prices of his add-ons. He assumes that users will
therefore purchase more add-ons, but because of the price reduction, profit contribution
from add-ons will slip from $20 per month to $15. However, he believes retention rate will
increase to 90% per month. Assume again these numbers will stay constant over time.
Also assume that the 500,000 impressions, the $7 cost-per-thousand, and the 50 users
downloading per 500,000 impressions remain the same as in part “a”.

Will Mr. Ford be better off with his new plan or should he stick with the old plan? Justify
your answer.

3. The Post

Mr. James is the circulation director for the St. Louis Post, a daily St. Louis newspaper.
The Post has three subscription types: (1) digital version only, (2) digital version + Sunday
print edition, and (3) digital + everyday print edition. A subscriber contributes annual
profits totaling $125, $150, and $200 respectively.

Mr. James realizes that customers “migrate” between different subscriptions types from
year to year. He finds from his analytics people that the probabilities of these migrations
are as follows:

Next Year
Digital Digital Digital No Subscription
Only + Sunday + Everyday (churned)
Digital Only .40 .05 .05 .50
Current Digital + Sunday .20 .40 .10 .30
Year Digital + Every Day .35 .20 .30 .15
No Subscription (churned) 0 0 0 1

That is, the customer who has a Digital-Only subscription in the current year has a 40%
chance of keeping the Digital-Only subscription next year, a 5% chance of moving to
Digital + Sunday, a 5% chance of moving to Digital + Everyday, and a 50% chance of
dropping their STL Post subscription altogether (churning).

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Mr. James also learns that he acquired 1000 customers with his recent customer
acquisition campaign: 800 of acquired customers started as Digital-Only subscribers, 150
started off with Digital + Sunday, and 50 started with Digital + Everyday.

a. What are the lifetime values of each type of subscriber: (1) those starting as Digital
only, (2) those starting as Digital + Sunday, and (3) those starting as Digital + Everyday?
Use a 7% annual discount rate.

b. Mr. James mentions to his assistant, “Those Digital-Only customers are so fickle. We
have a 50% churn rate with them, and most of the customers we acquired in that last
campaign are Digital-Only. I know the reason – they have so many online alternatives it’s
easy to cut us off. Also, despite our best efforts to make the digital experience engaging,
there is nothing like print to get the customer engaged. I’d like to develop a marketing
campaign that I assume will acquire the same number of customers but instead of them
being 800 Digital-Only, 150 Digital + Sunday, and 50 Digital + Everyday, they’ll be 600
Digital-Only, 350 Digital + Sunday, and 50 Digital + Everyday. How much can I afford
to spend per acquired customer on this campaign?”

Please respond to Mr. James and make appropriate calculations to back up your response.