Based the LTV example in the marketing math spreadsheet, what is false? a. Life time value for the Home Theater example is 950 dollars. b. Can affect how managers work with customers. c. NPV adjusts profits from different years because 1 dollar earned in year one has a different worth than 1 dollar earned in the 5th year. d. Is a long-term evaluation of customers. e. Fixed costs really hurt positive LTV numbers.
Based the LTV example in the marketing math spreadsheet, what is false? a. Life time value for the Home Theater example is 950 dollars. b. Can affect how managers work with customers. c. NPV adjusts profits from different years because 1 dollar earned in year one has a different worth than 1 dollar earned in the 5th year. d. Is a long-term evaluation of customers. e. Fixed costs really hurt positive LTV numbers.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Based the LTV example in the marketing math spreadsheet, what is false?
a. Life time value for the Home Theater example is 950 dollars.
b. Can affect how managers work with customers.
c. NPV adjusts profits from different years because 1 dollar earned in year one has a different worth than 1 dollar earned in the 5th year.
d. Is a long-term evaluation of customers.
e. Fixed costs really hurt positive LTV numbers.
![Lifetime Value of one customer (LTV):
Example: Home Theater Equipment
Revenue of one paying consumer
Average Home Theater purchase from one customer.
Average initial purchase amount - REVENUE $ 2,000.00 Revenue = units sold * price. In this case one unit has been sold. This means
price is $2,000 * 1 = 2000.
Costs of providing product 70% of price
Costs per unit of production (%)
Costs per unit of sales and marketing (%) 6.00%
Contribution Margin (%)
64.00%
30.00% Cost to build the product is 64% of selling price, costs of marketing/selling is
6% of selling price, so 30% is contribution 1 [100%-(64%-6%)].
1. Contribution is defined as the difference between the selling price of an item
and the variable costs of producing and selling that item. It is in essence the
amount of money per unit available to the marketer to cover fixed production
costs, corporate overhead. Once fixed costs are covered, the contribution
margin represents pre-tax profits.
$ 600.00 $2000*30%. This amount can be applied to fixed costs and then profit.
We won't worry about fixed costs - accepted managerial accounting practice.
CONTRIBUTION MARGIN ($) YEAR 1
Lifetime Value of this customer over 5 years
YEAR 1 $ 600.00
YEAR 2 $
YEAR 3
50.00 Contribution margin for year 2 adjusted for Net Present Value (NPV 2)
0.00 Contribution margin for year 3 adjusted for Net Present Value (NPV 2)
0.00 Contribution margin for year 4 adjusted for Net Present Value (NPV 2)
YEAR 5 $ 300.00 Contribution margin for year 5 adjusted for Net Present Value (NPV 2)
YEAR 4
LTV $ 950.00 Add up all 5 years
2. LTV is a long-term measure of the worth of a customer to a company. Since
1 dollar has a different worth in year 1 compared to; year 2, ... year 5,. So, you
can say year one is an apple, year 2 is a bananna, year 3 is grapes, year 4 is
cherries and year 5 is oranges. To determine LTV we need to make all the
years contribution margins as apples. NPV is a mathematical way to that.
A benefit to LTV is making marketers aware how important a consumer is. For
instance, LTV can affect how marketers treat customers who call with a
complaint of the product. Often times, short sighted managers would ignore
the customer because it would cost money. Basically looking at this
calculation, cost to fix the product is 300 dollars what would you do? Fix it! the
customer is worth 950 dollars. There are many other uses as well.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F60ae2238-d375-4701-9aec-2226c586eada%2F35cfc188-f44c-4ebc-8542-59bea9126556%2Fhahgzz_processed.png&w=3840&q=75)
Transcribed Image Text:Lifetime Value of one customer (LTV):
Example: Home Theater Equipment
Revenue of one paying consumer
Average Home Theater purchase from one customer.
Average initial purchase amount - REVENUE $ 2,000.00 Revenue = units sold * price. In this case one unit has been sold. This means
price is $2,000 * 1 = 2000.
Costs of providing product 70% of price
Costs per unit of production (%)
Costs per unit of sales and marketing (%) 6.00%
Contribution Margin (%)
64.00%
30.00% Cost to build the product is 64% of selling price, costs of marketing/selling is
6% of selling price, so 30% is contribution 1 [100%-(64%-6%)].
1. Contribution is defined as the difference between the selling price of an item
and the variable costs of producing and selling that item. It is in essence the
amount of money per unit available to the marketer to cover fixed production
costs, corporate overhead. Once fixed costs are covered, the contribution
margin represents pre-tax profits.
$ 600.00 $2000*30%. This amount can be applied to fixed costs and then profit.
We won't worry about fixed costs - accepted managerial accounting practice.
CONTRIBUTION MARGIN ($) YEAR 1
Lifetime Value of this customer over 5 years
YEAR 1 $ 600.00
YEAR 2 $
YEAR 3
50.00 Contribution margin for year 2 adjusted for Net Present Value (NPV 2)
0.00 Contribution margin for year 3 adjusted for Net Present Value (NPV 2)
0.00 Contribution margin for year 4 adjusted for Net Present Value (NPV 2)
YEAR 5 $ 300.00 Contribution margin for year 5 adjusted for Net Present Value (NPV 2)
YEAR 4
LTV $ 950.00 Add up all 5 years
2. LTV is a long-term measure of the worth of a customer to a company. Since
1 dollar has a different worth in year 1 compared to; year 2, ... year 5,. So, you
can say year one is an apple, year 2 is a bananna, year 3 is grapes, year 4 is
cherries and year 5 is oranges. To determine LTV we need to make all the
years contribution margins as apples. NPV is a mathematical way to that.
A benefit to LTV is making marketers aware how important a consumer is. For
instance, LTV can affect how marketers treat customers who call with a
complaint of the product. Often times, short sighted managers would ignore
the customer because it would cost money. Basically looking at this
calculation, cost to fix the product is 300 dollars what would you do? Fix it! the
customer is worth 950 dollars. There are many other uses as well.
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