Question

PLEASE USE (CLV = M x L - AC ) Formula

DirecTV is contemplating offering customers who switch from Comcast, a
prepaid VISA card. However, they need to estimate the value of the prepaid
VISA card they can offer.

The estimated monthly contribution per customer is $60. Based on a recent
analysis of their customer data, they have determined that they lose
approximately 12% of their customers each year. Based on an analysis of their
past customers, DirecTV has estimated that each new customer is worth
approximately $5,600 over their expected purchase lifetime.

1) Using the information above, determine the maximum value of the prepaid
VISA card that DirecTV can spend to acquire a customer. (2.5 points)

Information for Next Year (Use this for the Next 2 Questions):
DirecTV is anticipating that next year, they will likely be able to only able to retain
90% of their customers, due to reduced competitive activity from other cable and
satellite service providers.

2) Assuming that the same prepaid VISA card will continue to be offered, what is
each customer now worth over to DirecTV over their expected purchasing
lifetime? (2.5 points)

3) For the next year, if DirecTV’s discount rate is 9%, then calculate the CLV
incorporating the time value of money. (2 points)

Answer 1

DirecTV can offer a prepaid VISA card up to the value of the customer's lifetime value of $5,600 without incurring a loss. If DirecTV's retention rate drops to 90%, a customer's new lifetime value is $7,200, not accounting for the time value of money.

Step-by-step explanation:

To answer the first question, we need to determine the maximum value of the prepaid VISA card that DirecTV can offer to acquire a customer. The maximum value would be the customer lifetime value (CLV) minus the acquisition cost (AC). Using the CLV formula (CLV = M x L - AC), where M is the monthly contribution per customer ($60), L is the customer lifetime (calculated by dividing 1 by the annual loss rate, which in this case is 88% retention or 12% loss, so L = 1/0.12 = 8.33 years), and AC is the acquisition cost. Since we know that each new customer is worth approximately $5,600 over their lifetime, the maximum value for the prepaid card that could be offered without resulting in a loss would be $5,600.

For the second question, given that DirecTV can now retain only 90% of their customers, this changes the customer lifetime. With a 10% annual loss rate, the customer lifetime L becomes 1/0.10 = 10 years. Assuming the monthly contribution per customer remains $60, the new CLV over the expected purchasing lifetime is (M x L), which equals $60 x 12 x 10 = $7,200.

To calculate the present value of CLV for the next year (third question), we will use the discount rate of 9%. CLV should incorporate the time value of money, which means it must be discounted back to present value terms. The present value of an annuity formula can be used, but since sufficient data is not provided regarding the exact timing of the cash flows, we cannot calculate this without making assumptions. Typically, the calculations would involve discounting each year's cash flow back to present value using the formula PV = C / (1 + r)^t, where C is the cash flow, r is the discount rate, and t is the time period.