A coffee shop's average transaction price is $4 and its contribution margin is 60 percent. A typical customer makes a purchase once a week or 52 times per year, and the management estimates the value of the loyal customer over the buying life cycle as $720. The customer defection rate is _____.
A) less than or equal to 0.10
B) more than 0.10 and less than or equal to 0.15
C) more than 0.15 and less than or equal to 0.20
D) more than 0.20 and less than or equal to 0.25

Question

Quizplus · Accepted Answer

The formula for calculating customer lifetime value (CLV) is:
CLV = average transaction value x contribution margin x  (1 / customer defection rate)

Using the given values, we can solve for customer defection rate:

$720 = $4 x 0.6 x (1 / customer defection rate)
customer defection rate = 0.2083

Rounding to the nearest hundredth, the customer defection rate is about 0.21 or 21%.

Therefore, the best choice is C, more than 0.15 and less than or equal to 0.20.

A Coffee Shop's Average Transaction Price Is $4 and Its