7c. READING

Question 1

Why is customer lifetime value important?

Answer 1

Because if a company spends more to acquire customers than those customers generate over time, the company can become unprofitable or fail.

Question 2

What does the Groupon pizza example illustrate?

Answer 2

A company may accept a loss on an initial purchase if the new customer is expected to generate enough future profit to more than offset that loss.

Question 3

What is the per-period retention rate?

Answer 3

It is the percentage of customers kept from one period to the next.

Question 4

What is churn rate? (in context of retention rate)

Answer 4

Churn rate = 1 − retention rate.

Question 5

What is the customer value multiplier?

Answer 5

It is the factor that converts profit from one period into the customer’s long-term value. A multiplier of 4 means long-term value is four times first-period profit.

Question 6

What assumption is made in the basic customer value template?

Answer 6

Each customer generates the same profit margin each period.

Question 7

What is sensitivity analysis?

Answer 7

It is the study of how changes in model inputs affect model outputs.

Question 8

How do you estimate the probability that a customer is still active?

Answer 8