Shirley Miller has decided to join a hiking club. The club charges a membership

Question

Shirley Miller has decided to join a hiking club. The club charges a membership fee of $25 per year. The membership entitles Shirley Miller to join 4 hikes a year, which she utilizes to the maximum. During a hike, she usually buys some hiking equipment and a sports drink from the club. On average, she spends $50 during each hike with the club and the cost of providing the required products runs to about $20 for the club. Assume a 4% discount rate and the club loses about 30% of its customers a year.

Answer the questions sequentially, and keep adding the new information given in each question to the next one.

1. What is Shirley’s CLV for the club?

2. As part of the promotion to get new members, the club conducted a free hike and provided food, drinks, and equipment. The free hike attracted 10 hikers (one of which is Shirley) and cost the club $250 to conduct. They also send her flyers and mails that cost $6 a year. With these costs added in, what is
her new CLV? Does this advertising campaign make sense for the club to do?

3. During a hike, Shirley Miller meets the CEO of the club, and mentions to him that inflation is so low that a 4% discount rate is not reasonable, and that the market discount rate is about 2.5%. Assuming the same costs described above, what is the CLV that the CEO should assign to Shirley? (Assume the same costs are same as that given in question 2.)

4., Shirley Miller slips and falls down during a difficult turn, which the hiking guide didn’t warn her about. She is very upset and tells the club that she is leaving unless she is compensated. What is the maximum amount the club should be willing to pay out to retain Shirley as a client? (Assume the same costs and interest rate are same as that given in questions 2 and 3.) Discuss your answer. If you were the manager, what would you do?

Explanation / Answer

1.Shirley's CLV for the club is given by :    CLV =Gross Margin *((Retention rate /1+Discount rate-Retention rate)) First we calculate Gross Margin for the club for Shirley    Gross Margin=Membership charges+Equipment and drinks charges-cost of providing equipments    =25+(50*4)-(20*4)    =25+200-80=$145 The club is losing customers @30% every year Therefore the retention rate =70%    CLV=145*(0.7/1+0.04-0.7)=145*(0.7/0.34) =298.5   2. In this case Gross Margin is calculated as below: Gross Margin=Membership charges+Equipment and drinks charges-cost of providing equipments-cost of flyers and mails    For the free hike ,the cost of providing equipments and drinks per member =(250/10)=25 Gross Margin=25+(50*4)-(20*4)-25-6 =25+200-80-31=145-31 =114    CLV=114*(0.7/1+0.04-0.7) =$234.7    This advertising campaign makes sense if atleast one new member(out of 9) joins the club and attends 4 hikes in a year.If no one subscribes for a membership,the company would incur a loss of $256 for the promotional event conducted.

3.Assuming the same costs as in question 2,and changing the discount rate to 2.5 % CLV=114*(0.7/1+0.025-0.7)    =114*(0.7/0.325)=$245.5    4.The CLV for shirley after the free hike and discount rate reduction is $245.5.This is the total amount that the club earns from Shirley as their client.So,the maximum amount the club should be willing to pay Shirley should not exceed $245.5. As a manager,it is better to negotiate with Shirley and compensate her with the amount less than or equal to $245.5 because the club cannot afford to lose customers further as the churn rate is already high at 30% and hence retain Shirley .

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