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Customer Life Time Value Exercise for Jones Blair Management

Jones Blair Management is considering focusing on the DFW professional painters. There are 400 professional painters in this area who buy paint worth 14.4 M per year. Average gross margin for Jones Blair is 35% and it currently has $4.2M sales in this segment. Current retention rate of painters is 75% and their revenue is stable over time.

(a) The director of marketing proposes a one-time spending of $500,000 to directly market to painters. How many painters would you need to acquire to make this investment pay off in the long term?
(b) The marketing director also wants to find out the maximum amount of money he should spend to increase the retention rate of the current professional customers from 75% to 85%

How do you calculate the cost of acquiring a customer to answer question a & b.

Solution Preview

As the firm looses 25% of its customers each year, the average life-time of a customer will be 1/25%=4 years

Calculations for Customer life time value:
Annual purchase per professional = 14,400,000 / 400 = $36,000
Average annual gross margin per professional = 36000*35% = 12600
Customer life time value = ...

Solution Summary

Guidance and computations given (about 300 words). No references.