KEM Company has begun studying customer lifetime value for its customers and has prepared the information below for selected customers. For simplicity, management has assumed that for a given customer, the retention rate is the same every year until the customer departs. For Customer 4, costs (ct) were incurred to promote customer retention in years 1 and 2.
Required
(a) Compute the customer lifetime value for each customer for the stated number of years.
(b) Discuss the reasons for differences in customer lifetime value between Customers 1 and 2, Customers 1 and 3, Customers 1 and 4, and Customers 3 and 4.
(c) Compute the customer lifetime value for Customers 1, 2, and 3 assuming that n is very large and the numbers in the table remain about the same each year.
(d) How does information on a customer’s estimated lifetime value help a company manage its customer acquisition and loyalty programs?