Quiz

1.

Compute the discount rate in the third year. Interest rate = 6 percent. Risk factor = 1.4.

2.

Use this number to compute the net present value of profits in the third year, if the profits are $45,447,221.

3.

Compute the retention rate for years 1 and 2 in the following table, given the number of customers shown.

	Year 1	Year 2	Year 3
Customers	312,886	219,445	188,994
Retention rate

4.

If a company has a retention rate in the second year of 60 percent, what will selling an additional product to the customer in that year do to the retention rate in the third year compared to what it would have been?

1. Make it go up.

2. Make it go down.

3. Not enough information is given to know one way or the other.

4. It depends on the discount rate.

5. It depends on the lifetime value.

5.

Which is more important in determining potential lifetime value?

1. The probability of the customer’s buying an additional product

2. The profitability of the customer’s buying that product

3. Current lifetime value

4. Both a and b

5. None, since potential lifetime value cannot be predicted

6.

What is the best way for marketing to justify its annual budget?

1. Movement in the discount rate

2. Movement in the lifetime value in future years

3. Movement in the potential lifetime value of prospects

4. Reduction in the retention rate

5. None of the above

7.

What is the next best product for a customer?

1. The one with the most margin for the seller.

2. The one with the highest probability of a sale.

3. This cannot be known in advance.

4. The one with the highest value to the company, which is determined by multiplying the probability of purchase and the profitability if purchased.

5. The one with the highest lifetime value if purchased.

8.

If analysis shows that LTV will go down in future years, what should you do?

1. Revise your marketing program.

2. Redo your LTV tables, since future LTV always goes up.

3. Revise the discount rate.

4. Add more marketing dollars.

5. Reduce the retention rate.

9.

Suppose you have two segments. Segment A has an LTV of $150 in 3 years, and segment B has an LTV of $200 in 3 years. What should your strategy be?

1. Work to retain segment B and increase the LTV of segment A.

2. Get rid of segment A and find more people that fit into segment B.

3. You can’t decide based on what we know at present.

4. Retain both, since the LTV is positive.

5. None of the above.

Answers

1.

D = (1 + i * rf)ⁿ = (1 + 0.06 * 1.4)² = 1.175

2.

$45,447,221/1.175 = $38,678,486

3.

	Year 1	Year 2	Year 3
Customers	312,886	219,445	188,994
Retention rate

4.

(a) Make it go up

5.

(d) Both a and b

6.

(b) Movement in the lifetime value in future years

7.

(d) The one with the highest value to the company, which is determined by multiplying the probability of purchase and the profitability if purchased

8.

(a) Revise your marketing program.

9.

(a) Work to retain segment B and increase the LTV of segment A.