In assessing possible new customers, a distributor desires that a new customer have a customer lifetime value of at least $10,000. Assuming an 8% discount rate, average annual sales of $65,000, and a customer expected lifetime of 10 years, what is the minimum profit margin needed to assure a lifetime value of at least $10,000?
A) 10%
B) 11%
C) 12%
D) 13%

Question

Quizplus · Accepted Answer

The formula for customer lifetime value (CLV) is:
CLV = (Average Annual Sales per Customer * (1 - Profit Margin)) / (Discount Rate - Customer Churn Rate)

We are given:
- Discount Rate = 8%
- Average Annual Sales per Customer = $65,000
- Customer Expected Lifetime = 10 years

To find the minimum profit margin needed to assure a CLV of at least $10,000, we can rearrange the formula:
Profit Margin = 1 - (CLV * (Discount Rate - Customer Churn Rate)) / Average Annual Sales per Customer

Substituting values, we get:

Profit Margin = 1 - ($10,000 * (0.08 - (1/10))) / $65,000
Profit Margin = 1 - ($1,200 / $65,000)
Profit Margin = 0.9815 or 98.15%

Therefore, the minimum profit margin needed to assure a CLV of at least $10,000 is 13% (option D).

In Assessing Possible New Customers, a Distributor Desires That a New