In Style is a direct catalog retailer trying to attract new customers by sending catalogs at a cost of $5 each. They estimate a 5% response rate from catalogs, with an average $150 order that has a 70% margin after $10 processing and $15 delivery costs. Existing customers are retained through monthly catalogs costing $10 each, with a 20% response rate. The customer lifetime value is calculated to be $252.94 per customer, based on acquiring customers at a $20 cost, and generating $72 in discounted contribution each year over 5 years through retention catalogs.

1. UPDATED: Customer Lifetime Value Exercise: In Style 2
A direct catalog retailer of fashion goods, In Style, is trying to attract new customers
by sending out catalogs. The cost of sending a catalog (which includes production and
mailing) is $5. From experience, In Style anticipates the percentage of individuals
who receive the catalog and purchase from it to be 5%.
The average order placed with the company is $150. The margin for all products is
about 70%, order processing is about $10 per order, and delivery/shipment costs is
about $15 per order.
Assume that each of the customers acquired will stay with the company for 5 years.
Each year, In Style tries to retain these customers by sending a monthly catalog and
the cost of sending out each catalog is $10. Historical records show that the response
rate for these existing customers is about 20%.
What is the CLTV of an In Style customer?
Note: Assume a discount rate of 10% (i = 10%) in making the calculation.

2. Customer Lifetime Value Exercise Solution
1. Net acquisition cost of an InStyle customer:
Acquisition cost = $5 per catalog / 5% response rate = $100
Contribution = Order Value – Variable Costs
Order Value = $150 per order
Variable Costs = ($150 * (1 – 70% margin)) + $10 processing cost per order
+ $15 delivery/shipment cost per order.
= $150 – $70 = $80
Net acquisition cost = $100 - $80 = $20 per customer
2. Total discounted net value of an InStyle customer:
Year 1 Year 2 Year 3 Year 4 Year 5
Cost $10 per catalog * 12
months = $120
$120 $120 $120 $120
Contribution $80 contribution/order *
20% response rate * 12
months = $192
$192 $192 $192 $192
Net value $192- $120 = $72 $72 $72 $72 $72
Discounted
net value
$72/1.1 $72/(1.1^2) $72/(1.1^3) $72/(1.1^4) $72/(1.1^5)
Total discounted net value = $272. 94 per customer
3. CLTV of an InStyle customer:
= $272.94 - $20 = $252.94 per customer