Question

On the other side of the street is a community run ladies-only gym, called Sculptress. Sculptress has branches throughout the city and spends an average of $50 per member on local media advertising. Their policy is to provide an inexpensive, friendly, no frills service. As such, for them to be successful, they need to have lots of members. Sculptress's profits are $600 per customer per year for an average of 3 years. They assume that they will lose 5% of their members each year and use a 10% discount rate per year to account for the time value of money. For simplicity, Sculptress assumes all profits are accrued at the beginning of the year. What is Sculptress’ Customer Lifetime Value (CLV)?

Answer 1

The Customer Lifetime Value for Sculptress is obtained by calculating the present value of the expected profits per customer over a 3-year period, adjusted for an annual churn rate of 5% and discounted at a rate of 10% to account for the time value of money.

Step-by-step explanation:

The concept of Customer Lifetime Value (CLV) involves calculating the total revenue a business can expect from a single customer account throughout the business relationship, taking into account both the profits and the costs associated with maintaining the relationship. When calculating the CLV for Sculptress, a ladies-only gym, the profits generated per customer averages to $600 per year over an average of 3 years. As the business expects to lose 5% of their members each year and applies a 10% discount rate to account for the time value of money, we need to adjust the profits for these specifics.

Here is a step-by-step explanation of how to calculate the Customer Lifetime Value for Sculptress.

1. Calculate the annual profit per customer after the expected churn rate (5% member loss), which equals 95% of $600.
2. Apply the discount rate for each year to calculate the present value of the future profits.
3. Sum up the present values of these profits over the 3 years to obtain the CLV.

The calculations would lead to a CLV of the sum of the present values for each year, which can be found using the formula for the present value of an annuity.