Concept of value of a loyal customer

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Reference no: EM1386396

Joe, the owner manager of Joe's Barbeque, has recently become acquainted with the concept of Value of a Loyal Customer (VLC). He had always rather intuitively thought that his "regulars" were the ones that were most valuable to his business. Now he is not as sure. As he pondered this, he noticed one of his regulars getting his regular meal, and $ 10 sandwich plate. He remembered that this guy came in about two or three times a week at lunch and almost always got the same thing. So, he figured that this customer spent $ 10 per visit and probably came in about 120 times per year. He then considered a family that came in three or four times per month or an estimate of 42 times per year and consistently spent about $ 24 per visit. His contribution margin is about 16% and he figures he loses about 20% of his customers.

Formula: VLC = P * RF * CM * BLC
Where:
P = revenue per unit (or price per unit
CM = contribution margin to profit and overhead expressed as a fraction
RF = repurchase frequency = number of purchases per year (or other time period) BLC = buyer's life cycle = 1 / defection rate (expressed in years)
Defection rate = 1 - retention rate

I have come out with the answers $960 for the man and $806.40 for the family.

Reference no: EM1386396

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