A manufacturer of laptop computers has a 75 percent customer retention rate. Their accounting department estimates the incremental contribution to profit and overhead as 35 percent. On average, customers purchase the laptop every two and a half years at an average cost of $750. Determine the average value of a loyal customer.

Answer: The answer is $420

Explanation

Using the formula

Price * contribution margin * Average retention time * Customer retention rate

Price = $750

Contribution margin = 35% (35 : 100) = 0.35

Average retention time = two and half years

Customer retention rate = 75% (1 - 0.75) = 0.25

750 0.35 * 1/2.5 * 1/0.25

= 750 * 0.35 * 0.4 * 4

= 420

Therefore the average value of a loyal customer is $420

Retention rate = 75%

Contribution to profit and overhead = 35%

Purchase laptop every 2,5 years (1/2.5=0.4 per year)

Average cost = $750

Value of loyal customer =

= Price * Purchase frequency * Gross margin * 1 / (1-Retention rate)

Value of loyal customer = 750*0.4*0.35*1 / (1-0.75) = 750*0.4*0.35*1/0.25 = $420