SyPhone Case Discussion

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University of Minnesota-Twin Cities *

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722

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Management

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Apr 3, 2024

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docx

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10

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The SyPhone case features a (fictitious) cell phone company that sells contracts to small to medium-sized companies. The goal of this case study is to introduce students to the concept of customer lifetime value and how it can help companies think strategically about what types of customers are valuable to them in the long run. To access the case study dashboard, please log in to your Enginius.biz account, select "dashboard" at the top, then choose your license. On the left-hand side of the manual, select "case studies" and then pick SYPHONE (LIFETIME). The case study data is already uploaded, and you can begin analyzing it from there. CLV results can be different based on the options you selected in the menu. Please insert a screenshot of the parameters selected in your model in your report. Using the Enginius CLV model and a discount factor of 10%, answer the following questions: 1
Question 1.1 What is the lifetime value of a typical customer in each of the four segments, in current dollar values? [Here are several hints for you: 1) When calculating the lifetime value (LTV) of a typical customer in each of the four segments, it is important to consider whether to include "next-period costs" and "acquisition costs". In this case, the marketing costs mentioned can be considered next- period costs. However, the decision to include these costs in the LTV calculation will depend on the available data and other factors. 2) When calculating the lifetime value of a typical customer in each segment, it is crucial to select either a transactional or contractual model. The decision should be based on the specific attributes of the business and the data that is accessible. Please clarify the reasons for your selection of either model over the other? - I chose the contractual model because typically cell phone plans have contracts for at least the first year 3) It is recommended to consider whether a discount rate should be applied to the first period. Typically, this decision is linked to the selection of the transactional or contractual model. If customers are currently under a contract, there is a commitment to the current period, and thus, no discount rate would be applied to the first period. Conversely, if customers are free to leave at any time, it would be appropriate to apply a discount rate to the first period cash flow. - Because I chose the contractual model, I would not apply a discount rate in the first year because that is the typical length of the contract. To maintain the customer base after the first year I would suggest running a 10% discount. 4) How much is a typical customer worth in each of the four segments, in current dollar values? Please provide your responses for each segment separately.] Customer lifetime value ($) Large accounts $ 130 402.60 Large accounts, rebate $ 97 714.29 Small accounts $ 19 126.92 Small accounts, rebate $ 16 300.00 - After calculating the customers lifetime value, we see that the large account customers have an average of $130,402.60, the large accounts with rebate have a lifetime value of $97,126.92, the small account customer have a value of $19,126.92 and the small accounts with rebate customers have a value of $16,300.00. - We can see that the large account customers who do not have rebate have the highest customer lifetime value. 2
Question 1.2 What is the value of the customer base, in current dollar value? [Hints: The concept of the value of customer base and lifetime value of a typical customer are distinct. The key difference between them is that while the value of customer base considers the overall worth of all customers to the company, the lifetime value focuses on the profit generated from individual customers.] - In the model I have calculated; the predicted customer base evolution and selected discount rate, the customer base is currently valued at $478,514,486. This value does not include any customer acquisition fees. Question 1.3 Compare the lifetime value of a typical customer in each of the four segments to the “Gross margin” figures in the original spreadsheet. What can you learn from this comparison? [Hints: To properly compare the lifetime value of customers in each of the four segments with the "Gross margin" figures in the original spreadsheet, it is important to consider the relationship between the two. While customers in the large account segment who do not negotiate a rebate generate gross margins 75% higher than those who do, their lifetime values do not follow the same pattern. For example, the gross margin for large accounts is $63,000, while for large accounts with a rebate it is $36,000, resulting in a 75% increase [(63,000-36,000)/36,000]. Similar calculations can be made for the percentage increase in their CLV values. The same trend is observed for the small accounts segment, where both sub-segments have lifetime values that differ from what the gross margins suggest. Therefore, it is crucial to thoroughly examine the data and comprehend the reasons behind any inconsistencies between the lifetime value and gross margin figures. What factors may contribute to the disparities between the lifetime value and gross margin figures?] - Although the Large accounts have the highest Gross Margin, when it is applied to the Customer lifetime Value the Large accounts with rebates have a higher percentage outcome. - The same is true for small accounts and small accounts with rebates. - This can conclude that accounts with rebates have a higher long-term value for SyPhone whereas the accounts without rebates are more profitable short-term. Number of customers Gross margins ($) Marketing costs, next period ($) Customer Lifetime Value Customer Lifetime Value (as percentage of Gross Margin) Large accounts 500 63000 5000 130402.6 207% Large accounts, rebate 2000 36000 4000 97714.29 271% Small accounts 5000 10800 1500 19126.92 177% Small accounts, rebate 7500 7200 1000 16300 226% 3
Lost customers 0 0 0 0 0% 4
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