Tuscan Lifestyles Exercise Calculation Explanations I apologize for explaining so many of my calculations, but I doubted myself the whole

time so I wanted to make sure that you could follow my thinking.

Initial order < $50 Prospects: acquired customers / response rate = 4657/.023 Retention rate = I divided the number of ordering customers in a year by the number of ordering customers in the previous year. Here I am assuming that no customers stop ordering one year but then ordered again in the next. Number of orders: Using Exhibit 1 for T=1,2,3,4,5, I multiplied the number of orders times the corresponding frequency and then added the results to get the total number of orders for each year. Avg # orders = number of orders / ordering customers Order size $ = number of orders x mean (from Exhibit 3) Cost of goods sold $: Since gross margin is 42%, cost of goods sold must be 58% of revenues Total margin $ = .42 x revenues Catalog related costs at T=0: .85 x number of prospects Catalog related costs at T=1,2,3,4,5: .75 x 8 x 4657

Initial order > $50 I followed the same calculations above, except the number of acquired customers was 3296.

Nidhi Geevarghese

Tuscan Lifestyles Exercise September 15, 2010 1. What is the average lifetime value of a customer whose initial purchase was less than $50? -$13.36 2. What is the average lifetime value of a customer whose initial purchase was more than $50? $115.00 3. Based on the expected lifetime values, what marketing plans might be advisable? Because the customer lifetime value of the group whose initial purchase was less than $50 is a negative value, the marketing plans with regard to theses customers should be seriously reconsidered. The company should not continue to spend money to retain these customers since the value/contribution of these customers to the business is negative. Going forward, the company should send fewer catalogs to these customers or even stop sending catalogs altogether. Additionally, from now on, when the company acquires new customers who spend less than $50 on their initial purchase, the company should send fewer catalogs in an effort to retain them or not send any catalogs at all. Instead, the company should focus its marketing efforts on the customers whose initial purchase was at least $50. It may be worth it to send more catalogs to these customers to retain them and attract additional orders. The company could also vary their marketing with these customers and utilize incentives of some sort, such as a customer loyalty program or free gifts/shipping with a minimum purchase. 4. Do you have suggestions for other ways to group customers to determine lifetime values? It might be helpful to group these customers according to various demographics, such as sex, age, race, income, education, and geographic location. It might also be beneficial to group the customers according to the type of purchase they made cookware, tableware, decorative accessories, etc. Determining the customer lifetime value of these groups would further allow the company to focus their marketing efforts on customers who provide value to the business, while minimizing efforts on those who do not.