Question

Eastern Motors Auto Dealership wanted to estimate the average CLV over a 5 year time horizon of a customer who purchases a new vehicle. The average vehicle sells for $25,500 and has a margin of 9%. Based on historical averages, 81% of people buying a new vehicle at Eastern will return for service 8 times over the next 5 years. Though it varies considerably, Eastern generates approximately $122 in margin on each service visit after accounting for parts and direct labor costs. What would be the value of a service loyalty program that increased the average number of visits by 2 (over 5 years) and increased the probability that a new vehicle purchaser would return for service by 5 percentage points (e.g. from 75% to 80%) on a per customer basis

Answer 1

the average profit from selling a car = $25,500 x 9% = $2,295

the average profit from providing 1 service = $122

customer lifetime value = (Annual profit per customer x customer relationship in years) - customer acquisition cost

the current CLV = $2,295 + ($122 x 8 x 81%) = $3,085.56

if you are able to increase the probability of using the company's maintenance services by 5% (from 815 to 86%), then the new CLV = $2,295 + ($122 x 8 x 86%) = $3,134.36

the difference = $3,134.36 - $3,085.56 = $48.80

Theoretically, you can spend up to $48.80 in the service loyalty program. But this analysis is incomplete, since providing a good service should also increase the possibility of selling a new car to the same customer after 5 years. This should extend the customer relationship for many years. E.g. that has been a major factor in the success of Honda and Toyota.