Calculating Customer Lifetime Value (CLV) for Salon Segments

CRM CLV HW example 1. Profiles is a salon that has clients in three segments: 420 wash, 180 braids, and 150 (works – wash, set, style, etc.). Profiles charges each segment an average monthly rate of $200, $600, and $1000, respectively. The costs to serve each segment on average are: $50, $250, and $400, respectively. The retention rates for the segments are 60%, 78%, and 82% respectively. Assuming an annual discount rate of 5%, calculate the following: a. CLV for each segment. Wash M = P-VC-RS = (200-50-0)* 12 months = $1800/year; r = 0.6 ; d = 0.05 CLV = Mr ( 1 + d − r ) CLV = 1800 ∗ 0.6 ( 1 + 0.05 − 0.6 ) = $ 2,400 Braids M = P-VC-RS = (600-250-0)* 12 months = $4300/year; r = 0.78 ; d = 0.05 CLV = Mr ( 1 + d − r ) CLV = 4200 ∗ 0.78 ( 1 + 0.05 − 0.78 ) = $ 12,133.33 Works M = P-VC-RS = (1000-400-0)* 12 months = $7200/year; r = 0.82 ; d = 0.05 CLV = Mr ( 1 + d − r ) CLV = 7200 ∗ 0.82 ( 1 + 0.05 − 0.82 ) = $ 25,669.57 b. Suppose the company decides that it would like to invest $50,000 next year on loyalty programs to increase the retention rate. How much would the retention rate need to increase to for each segment if the whole sum were spent in that segment? Wash M = P-VC-RS = (200-50)12months-(50000/420) = $1680.95/year; ; d = 0.05 CLV = Mr ( 1 + d − r )

CRM CLV HW example r = CLV ( 1 + d ) ( M + CLV ) r = 2400 ( 1 + 0.05 ) ( 1680.95 + 2400 ) = 61.75% Braids M = P-VC-RS = (600-250)* 12 months – (50000/180)= $3922.22/year; ; d = 0.05 r = CLV ( 1 + d ) ( M + CLV ) r = $ 12,133.33 ( 1 + 0.05 ) ( 3922.22 + $ 12,133.33 ) = 79.35% Works M = P-VC-RS = (1000-400)* 12 months – (50000/150) = $6866.66/year; r = CLV ( 1 + d ) ( M + CLV ) r = $ 25,669.57 ( 1 + 0.05 ) ( 6866.67 + 25,669.57 ) = 82.84% c. Instead of spending on retention, let us say they are going to spend it on advertising online to 200 customers in the local area. For each segment, how many customers would they have to acquire to breakeven? (hint: calculate Breakeven acquisition rate for each segment and multiply by target size). ¯ ¿ AC total targeted ¿¿ CLV ¿ ¿ Wash

CRM CLV HW example ¯ ¿ 50000 200 2400 = 10.41% They need to acquire 10.41% of the 200 targeted customers (21 more wash customers) to breakeven. Braids ¯ ¿ 50000 200 12,133.33 = 2.06% They need to acquire at least 2% of the 200 targeted customers (4 more braids customers) to breakeven. Works ¯ ¿ 50000 200 25,669.57 = 1% They need to acquire at least 1% of the 200 targeted customers (2 more works customers) to breakeven. d. Imagine that growth rates in contribution are different for each segment. They are 20%, 3%, and 5% respectively. Recalculate CLV for each segment. Which segment looks the most attractive now? Wash M = P-VC-RS = (200-50-0)* 12 months = $1800/year; r = 0.6 ; d = 0.05 ; g = 0.2 CLV = Mr ( 1 + d − r ( 1 + g )) CLV = 1800 ∗ 0.6 ( 1 + 0.05 − 0.6 ( 1.2 )) = $ 3,272.72 Braids M = P-VC-RS = (600-250-0)* 12 months = $4200/year; r = 0.78 ; d = 0.05 ; g = 0.03 CLV = Mr ( 1 + d − r ( 1 + g ))

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CRM CLV HW example CLV = 4200 ∗ 0.78 ( 1 + 0.05 − 0.78 ( 1.03 )) = $ 13,284.67 Works M = P-VC-RS = (1000-400-0)* 12 months = $7200/year; r = 0.82 ; g = 0.05 CLV = Mr ( 1 + d − r ( 1 + g )) CLV = 7200 ∗ 0.82 ( 1 + 0.05 − 0.82 ( 1.05 )) = $ 31,238.10 Works is still the most attractive segment.

CLV HW example(1)

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