Customer Life Time Value Model for Syphone
Question 1 What is the lifetime value of a typical customer in each of the four segments, in current dollar values? Compare these figures to the “Gross margin” figures in the original spreadsheet. What can you learn from this comparison?
Solution 1
Following are the lifetime value of a typical customer in each of the four segments, in current dollar values.
Segments / Segment description Customer lifetime value Gross margins
Large accounts $78,454 $63,000
Large accounts, rebate $70,769 $36,000
Small accounts $10,679 $10,800
Small accounts, rebate $10,919 $7,200
Lost customers $0 $0
The interesting thing that comes out when comparing the lifetime value of Customer and Gross margins for various Segments is that Customer accounts which are acquired by providing 20% rebates although have approx. 40% less gross margin in the initial year but they tend to generate quite a high amount cumulative profit in the long term and the difference is not as high as 40% initial margin. The difference in the Customer Life Time Value for large customers is about 10%.
In case of Small Accounts Customer Life Time Value of customer getting rebate goes on to overhaul the ones without rebate and moreover the small customers that are not getting rebate are unprofitable in the long run.
Question 2. Of the 15,000 customers SyPhone has today, how many will still be SyPhone customers in five years? What is the overall churn rate after five years? Answer the same questions, segment per segment.
Solution 2
In 5 years only 2221 customers will remain active with Syphone across all segments, the overall churn rate after 5 years will be about 85%. Segment wise churn rate is shown in the table below. The customers who get rebates tend to be more loyal in comparison to customers who do not get rebates.
Segments / Periods Current period Active Customers after 5 years Overall Churn Rate in 5 years
Large accounts 500 25 94.96716
Large accounts, rebate 2000 521 73.93233
Small
Solution 1
Following are the lifetime value of a typical customer in each of the four segments, in current dollar values.
Segments / Segment description Customer lifetime value Gross margins
Large accounts $78,454 $63,000
Large accounts, rebate $70,769 $36,000
Small accounts $10,679 $10,800
Small accounts, rebate $10,919 $7,200
Lost customers $0 $0
The interesting thing that comes out when comparing the lifetime value of Customer and Gross margins for various Segments is that Customer accounts which are acquired by providing 20% rebates although have approx. 40% less gross margin in the initial year but they tend to generate quite a high amount cumulative profit in the long term and the difference is not as high as 40% initial margin. The difference in the Customer Life Time Value for large customers is about 10%.
In case of Small Accounts Customer Life Time Value of customer getting rebate goes on to overhaul the ones without rebate and moreover the small customers that are not getting rebate are unprofitable in the long run.
Question 2. Of the 15,000 customers SyPhone has today, how many will still be SyPhone customers in five years? What is the overall churn rate after five years? Answer the same questions, segment per segment.
Solution 2
In 5 years only 2221 customers will remain active with Syphone across all segments, the overall churn rate after 5 years will be about 85%. Segment wise churn rate is shown in the table below. The customers who get rebates tend to be more loyal in comparison to customers who do not get rebates.
Segments / Periods Current period Active Customers after 5 years Overall Churn Rate in 5 years
Large accounts 500 25 94.96716
Large accounts, rebate 2000 521 73.93233
Small