Net-4-You is an Internet Service Provider that charges its 1 million customers $19.95 per month for its service. The company's variable costs are $.50 per customer per month. In addition, the company spends $.50 per month per customer, or $6 million annually, on a customer loyalty program designed to retain customers. As a result, the company's monthly customer retention rate was 78.8 percent. Net-4-You has a monthly discount rate of 1 percent. Suppose the company wanted to increase its customers' monthly retention rate and decided to spend an additional $.20 per month per customer to upgrade its loyalty program benefits. By how much must Net-4-You increase its monthly customer retention rate so as not to reduce customer lifetime value resulting from a lower customer margin?
Customer lifetime value = m(r/(1+I-r))
Where m = margin or profit from a customer per period= Monthly service charges ?variable cost ? Cost per customer per month for customer loyalty program designed to retain customers ...
Solution contains calculations of expected increase in the monthly customer retention rate require for maintaining customer lifetime value resulting from a lower customer margin.