What is the customer lifetime value of a customer that that generates $1,000 (on average) of annual sales? Assume a 7% discount rate, a 15% profit margin, and a customer expected lifetime of 10 years.
A) $140
B) $1,054
C) $21
D) Cannot be determined from the information given

Question

Quizplus · Accepted Answer

To calculate the customer lifetime value (CLV), we need to use the following formula:

CLV = (Annual revenue per customer x Gross margin) / (1 - Retention rate + Discount rate)

We know that:

- Annual revenue per customer = $1,000
- Gross margin = 15%
- Discount rate = 7%

To calculate the retention rate, we need to use the customer expected lifetime and the churn rate (which is the opposite of the retention rate). We know that the customer expected lifetime is 10 years, so the churn rate is 1/10 = 0.1. Therefore, the retention rate is 1 - 0.1 = 0.9.

Now we can plug these values into the formula:

CLV = ($1,000 x 15%) / (1 - 0.9 + 0.07)
CLV = $150 / 0.17
CLV = $882.35

Therefore, the customer lifetime value is $882.35, which is closest to option B.

What Is the Customer Lifetime Value of a Customer That