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Value of a Loyal Customer Conceptual Overview: Explore components that determine the value of a loyal customer. Maintaining customer loyalty, especially if repurchases are frequent, can obviously increase profitability. The value of a loyal customer (VLC) is the product of the revenue per unit (P), the contribution margin to profit and overhead expressed as a fraction (CM), repurchase frequency (RF, probability of purchase per year), divided by the defection rate (DR). The inverse or defection rate (1/DR) is also known as the Buyer's Life Cycle. That is: VLC = P'CM'RF/DR =P*CM RF BLC The graph below shows the VLC as a function of the defection rate. Drag on the graph to change the defection rate DR and observe how the VLC changes. For example, see how much VLC would change if the defection rate dropped from 0.4 to 0.2. Use the sliders to change either CM or RF and observe how the VLC curve changes 3,000 2,500 2,000 - Value of a Loyal Customer 1,500 1125...... 1.000 500 - 0 0.0 0.20 0.1 0.2 0.3 0.4 0.5 0.6 Defection Rate 07 0.8 0.9 1.0 CM=0.45 04 00 RF=0.5 1. In this example, when the contribution margin is 0.6, the probability of a purchase per year is 0.5, and the defection rate is 0.4, what is the approximate value of a loyal customer? a. 1,500 b. 750 C. 600 d. 1,125 -Select 2. If the defection rate doubles, what is the effect on the value of a loyal customer (VLC)? a. VLC does not change b. VLC is reduced by 50% C. VLC doubles d. The effect depends on the values of CM and RF Select 3. Which of the following will double the value of a loyal customer? a. Double the Contribution Margin b. Double the Repurchase Frequency Reduce the Defection rate by 50% d. Each of these options will double the VLC -Select

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