Customer Lifetime Value Analysis
due Week 8, Wedneesday, 5 MAR, 11:59 PM (midnight)
George and Jerry, brothers who have always been the best of friends, own a four bay automobile repair shop in a suburban neighborhood. Most of their business comes from repeat customers in the local neighborhood. Almost all of their business (revenue and profit) is for routine maintenance: annual (Texas) state inspections, oil changes, and component replacement of brake pads, water pumps, alternators, and such. Customers in their neighborhood own late model cars that rarely require major repairs such as cylinder head replacement or engine rebuilding.
George wants to start an on-going, never ending special deal for customers: On every third oil change, the customer gets two of the quarts on that oil change for free. George believes that this sales promotion will maintain repeat business and a lot of good will from loyal customers.
Jerry is furious. "If most of our business is from customers who return anyhow, your stupid sales promotion would merely cut into profits we would get anyhow. What about our customers who own elite automobiles and use synthetic motor oil -- that stuff is too expensive to just give away. And what about those who use regular motor oil? Now every third oil change, they'll want the expensive synthetic oil and we'll be giving away two quarts of it for free."
George and Jerry know that you are in MBA school and have asked for your assessment of George's idea. They want you to take one side or the other: they don't see it as one will win, one will lose. They both just want to know what is the best answer and they hope that you can persuade them that you have the solution.
Write a memo that settles this dispute of whether or not to run a permanent sales promotion of two free quarts of oil on every third oil change. Your analysis MUST assess issues of the lifetime value of a customer in THIS situation.
Your memo of about a page in length must be structured in the following format, not necessarily with any sort of headings:
If you have questions, be sure to post on the class discussion board (Blackboard). Before posting any questions or comments, however, be sure that you have studied reading assignments that are linked at the bottom of this document.
I will open only ONE file for this assignment, no matter how many you attempt to upload. The file must be in MS Word (.doc or .docx) format and your document must print in portrait (not landscape) orientation on 8.5 x 11 inch paper. If you want to add an appendix to the end your report -- additional pages for tables, graphs, calculations, and such -- it must be part of the same, single MS Word file that you upload.
Length is expected to be about a page, single spaced. Be sure that your name is typed at the top of your report followed by a report name that identifies the project.
While you are encouraged to collaborate with other members of the class (on the Blackboard forum and on your own) when thinking about how to work through these case assignments, THE WRITTEN REPORT THAT YOU SUBMIT MUST BE YOUR OWN WORK. Note that this is a marketing report, so a report that focuses only on numeric calculations is inadequate.
HOW/WHERE TO MAKE YOUR SUBMISSION
Be sure that you have selected the correct file! One way to ensure hat you don't make any mistakes is to create a special directory on your computer that is used only for the final submission, and put only one file in it. That way, you won't accidentally click on the wrong draft of your submission or unintentionally submit a letter you had intended to send to your great aunt.
READINGS FOR THIS ASSIGNMENT
This assignment asks you to assess the customer lifetime value - aka CLV or LTV (lifetime value of a customer). However, our text doesn't include any discussion of this. (Recall that there was some confusion at the start of the semester regarding what textbook had been assigned with this section.)
Here are some links to articles that should give you enough background into CLV/LTV to do this assignment. You must do some calculations in order to complete this assignment, but don't make it too complicated! The first article just gives you some background on the idea; the second two give you some examples of how to actually calculate the future value of a customer. I don't want your calculations to go beyond the first "basic formula"
(Average Value of a Sale) X (Number of Repeat Transactions) X (Average Retention Time in Months or Years for a Typical Customer)
that is presented in the second two articles.