Question

As VP of marketing for Bob’s Computer Shack, you are responsible for calculating the value of each of your customers. You determine that the average customer "lifetime" is 30 years and that on average customers will purchase a $2,000 computer every five years. On average, customers will spend an additional $100 dollars a year on additional products and services. Based on this information, the average lifetime value of a customer is:

Answer 1

Answer: The average lifetime value of a customer is $15,000.

Explanation: From the data provided a customer’s average lifetime is 30 years. For this given period, the customer on the average will purchase a $2000 computer every five years, which means for the entire period of the average customer lifespan, the customer would have spent 2000 dollars six times (that is 30 years divided by 5 which equals 6 purchases), which gives us 12000 dollars.

Also the customer spends 100 dollars every year on other products and services, that means a total of 100 times 30 which equals 3000 dollars.

If we take the customer’s average lifetime to be t, the total value of an average customer can be modeled as follows;

Value = 2000(t/5) + 100t

Where t = 30 years, the customer lifetime value can now be calculated as;

Value = 2000(30/5) + 100(30)

Value = 2000(6) + 3000

Value = 12000 + 3000

Value = 15000

Therefore the lifetime value of an average customer is 15,000 dollars