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AUNG

ZAN, MKT 9703

Tuscan Lifestyles, CLV

9/17/14

Tuscan Lifestyles is a company that markets home and kitchen accessories such as
cookware, linens, decorative items that reflect the style of Tuscany region in Italy. It is trying to
find out ways to reach out to more customers in a cost-effective ways. Marketing directors of the
company want to find out whether customers early buying behavior could indicate their future
revenue streams.
First, we need to calculate the value of customers over their lifetime with the company.
We start off with the assumption that customers will stay with the company for as many as 5
years. We will then calculate the value of customers based on the purchase history during 5
years. Furthermore, we will categorize customers into two groups, A and B: the former with
initial purchase more than 50 dollars, and the latter with initial purchase less than 50 dollars. We
will then analyze to see which customer group is more valuable and use the result to implement
our marketing strategies in the most cost-effective ways.
Our calculations indicate that the group-B customers failed to generate profit over 5-year
period while group-A generate significant profit margin. For both group, we can clearly see that
acquisition cost is very huge. Since acquisition cost is based on 2.3% response rate, we need to
find a way to increase the response rate by marketing target-customer lists instead of sending
catalogs out to general lists. Moreover, we also need to reduce annual retention cost by sending
fewer catalogs to infrequent customers.

Calculations Lifetime Value


Tuscan Lifestyles: Initial order < $50
Prospects
Acquired Customers
Ordering Customers
Response Rate %
Retention Rate %
Avg # Orders
Number of Orders
Order Size $
Revenues $

Time 0
Year 1
202,478.26
4,657
4,657
2.30%

Year 2
4,657
4,046

Year 3
4,657
1,918

Year 4
4,657
970

Year 5
4,657
927

4,657
820

86.88%
47.40%
50.57%
95.57%
1.00
1.17
1.36
1.44
1.42
4,657
4,741
2,612
1,399
1,312
$
31.84 $
32.09 $
41.78 $
51.05 $
52.43 $
$ 148,278.88 $ 152,138.69 $ 109,129.36 $ 71,418.95 $ 68,788.16 $

88.46%
1.33
1,093
53.63
58,617.59

Cost of Good Sold + other $


Total Margin $

$
$

86,001.75
62,277.13

$
$

88,240.44
63,898.25

$
$

63,295.03
45,834.33

$ 41,422.99
$ 29,995.96

$ 39,897.13
$ 28,891.03

$
$

33,998.20
24,619.39

Catalog-related Costs (Prospecting + Retention) $

$ 172,106.52

27,942.00

27,942.00

$ 27,942.00

$ 27,942.00

27,942.00

Net Margin (Gross Profit) Flow $


Discount rate
NPV Net Margin (Gross Profit)
Cumulitative NPV
Customer LTV (per acquired customer)

$ (109,829.39) $
1
(109,829.39)

Tuscan Lifestyles: Initial order > $50

Time 0

35,956.25 $ 17,892.33 $ 2,053.96 $


949.03 $
1.10
1.21
1.33
1.46
32,687.50
14,787.05
1,544.33
650.02
(77,141.89)
(62,354.84)
(60,810.51)
(60,160.49)

Year 1

143,304.35
3,296
3,296
2.30%

Year 2

Year 3

Year 4

(3,322.61)
1.61
(2,063.73)
(62,224.23)
-13.36

Year 5

Prospects
Acquired Customers
Ordering Customers
Response Rate %
Retention Rate %
Avg # Orders
Number of Orders
Order Size $
Revenues $

3,296
$
95.55
$ 314,932.80

3,576
$
93.46
$ 334,212.96

2,463
$
74.02
$ 182,311.26

1,315
$
67.75
$ 89,091.25

1,068
$
67.12
$ 71,684.16

$
$

837
78.26
65,503.62

Cost of Good Sold + other $


Total Margin $

$ 182,661.02
$ 132,271.78

$ 193,843.52
$ 140,369.44

$ 105,740.53
$ 76,570.73

$ 51,672.93
$ 37,418.33

$ 41,576.81
$ 30,107.35

$
$

37,992.10
27,511.52

Catalog-related Costs (Prospecting + Retention) $

$ 121,808.70

$ 19,776.00

$ 19,776.00

19,776.00

Net Margin (Gross Profit) Flow $


Discount rate
NPV Net Margin (Gross Profit)
Cumulitative NPV
Customer LTV (per acquired customer)

3,296
2,875

3,296
1,653

87%

19,776.00

57%

19,776.00

3,296
866
52%

3,296
761

3,296
623

88%

82%

10,463.08 $ 120,593.44 $ 56,794.73 $ 17,642.33 $ 10,331.35 $


1
1.10
1.21
1.33
1.46
10,463.08
109,630.40
46,937.79
13,264.91
7,076.27
120,093.48
167,031.28
180,296.18
187,372.45

7,735.52
1.61
4,804.67
192,177.12
58.31