SOLUTION: Clothing shop spends $80 for mailing and printing a catalogue which is sent to 100,000 prospects. The response rate to the mailing is 2.2%. Prospects who become customers spend $60

Question 1194187: Clothing shop spends $80 for mailing and printing a catalogue which is sent to 100,000 prospects. The response rate to the mailing is 2.2%. Prospects who become customers spend $6000 per year as long as they are still active customers. A customer has a probability of “attriting” (“churning”) each year of 15%. If a customer attrites, he or she ceases to be a customer and never returns. The firm also spends $350 per year in marketing (catalogues and service) to each active customer. The firm has a gross margin of 45% and uses a discount rate of 10%.
Calculate
i) Net Profit per customer
Answer by parmen(42) (Show Source): You can put this solution on YOUR website!
Certainly, let's calculate the Net Profit per Customer.
**1. Calculate Annual Customer Revenue:**
* Annual Revenue per Customer = $6,000
* Annual Gross Profit per Customer = $6,000 * 45% = $2,700
**2. Calculate Annual Customer Costs:**
* Annual Marketing Costs per Customer = $350
**3. Calculate Annual Customer Profit:**
* Annual Customer Profit = Annual Gross Profit - Annual Marketing Costs
* Annual Customer Profit = $2,700 - $350 = $2,350
**4. Calculate Customer Lifetime Value (CLTV):**
* CLTV = (Annual Customer Profit / (Discount Rate + Churn Rate))
* CLTV = ($2,350 / (0.10 + 0.15)) = $2,350 / 0.25 = $9,400
**Therefore, the Net Profit per Customer is $9,400.**
**Note:** This calculation assumes a perpetual customer relationship, meaning the customer remains active indefinitely. In reality, customer relationships may have a finite lifespan.
Let me know if you have any other questions or would like to explore different aspects of this scenario!

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