List your variables, write out the basic formulas, then calculate in the next st

Question

List your variables, write out the basic formulas, then calculate in the next step. Please fill in your answers below each question part in the document (in black font). The assignment is worth 60 points See brackets for point values. Please submit one copy per team. I encourage you all to try the questions and compare answers. That way, you will be checking each other to make sure they are correct. 1. Sprint charges its current customers an average of $60 per month. It costs Sprint S5.50 per month to serve these customers. It also spends $3 per customer per month to keep these customers loyal Over the last few years Sprint has been able to retain 78% of its customers. Assume a discount rate of 5% per annum a. Calculate Sprint's customer lifetime value of its current customers. [2] b. Sprint is willing to spend S450M in advertising to 20 million viewers, and S300M irn buying out contracts for T-Mobile and AT&T customers. They expect that at least 15% of those in the targeted group will switch. In addition to cutting rates of these potential customers in half, leading to an average monthly price of S50 per month per customer These customers would also pay S80 in activation fees. Calculate the CLV for these customers at the same discount rate, retention spending, and variable cost, however the retention rate is expected to be 88% for these new customers. (hint: Initial margin activation fee) [3] What is the minimum acquisition rate they would need to achieve for this promotion to be justified (breakeven acquisition rate)? [2] c. Acquisition Spending Initial Margin + CLV Breakeven Acquisition Rate - d. Assume that 3.5% of the targeted customers switched to Sprint, and year-to-year Sprint can increase their margins from these customers by 3%. Out of the buyout money, they paid an average of S500 in early termination fees per customer. Calculate their new CLV using the acquisition cost. (hint: use the formula with g. AC [advertising/number of people who switched]+ average buyout cost). [3] CLV Initial Mxr AC (1+d-r[ltg])

Explanation / Answer

Part a :

Average revenue per customer 60$

Discount rate 5%

Average revenue per customer after discount 57

Cost of serving 5.5$

Cost of retention 3$

Since 78% customers will retain therefore revenue =0.78*57=44.46

Customers lifetime value therefore =44.46-8.5=35.96$

Part b:

No of customers: 20 million

78% customers will retain

Customers who will flip : 15*20 million=3 million

Customers who will retain=0.88*3=2.64 million

Revenue per customers:60$

Discount rate:5%

Revenue per customer after discount : 57

78% customers will retain

Revenue for 13.26(78% of 17 million) million customers =13.26*50= 663 million dollar

Revenue for 2.64(88% of 3) million customers=2.64*80=2.32 million dollar

Cost for 20 million people =20*8.5=170 million dollar

Customer life value =(663+2.32-170)/20=24.76$

Part C:

Adv cost=450 million dollar

Contracts cost=300 million dollar

Total acquisition cost=750 million dollar

Total no of customers=20 million

Acquisition spending per person = 750/20=37.5$

Intial margin=80

CLV=24.76(calculated in part b)

Breakeven acquisition rate=37.5/(80+24.76)=0.35$

Part d:

3.5 % customers switch

3.5% of 20 million customers=0.7 million customers

Revenue from 0.7 million customers=0.7*1.03*50=36.05 million $

Cost of aquistion for these 0.7 million customers =0.7*37.5=26.25 million $

Net profit=36.05-26.25=9.8 million dollars

New CLV=9.8/20=0.49$

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