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    Home Alarm Answers

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    phoggydayal
    The document discusses calculating lifetime value (LTV) over 8 years for home alarm customers who use auto-pay versus those who don't. For new customers, LTV is $1373.66 for auto-pay vs $1064.87 without, so the maximum incentive budget is $308.79 per customer. For existing customers in their second year, LTV is $1436.88 with auto-pay vs $1107.94 without, allowing up to $328.94 in incentives per customer. Several marketing strategies are proposed to incentivize both new and existing customers to sign up for auto-pay, such as waiving fees or offering discounts, while still being profitable over the 8-year period

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    Home Alarm Answers

    Uploaded by

    phoggydayal
    3K views4 pages
    The document discusses calculating lifetime value (LTV) over 8 years for home alarm customers who use auto-pay versus those who don't. For new customers, LTV is $1373.66 for auto-pay vs $1064.87 without, so the maximum incentive budget is $308.79 per customer. For existing customers in their second year, LTV is $1436.88 with auto-pay vs $1107.94 without, allowing up to $328.94 in incentives per customer. Several marketing strategies are proposed to incentivize both new and existing customers to sign up for auto-pay, such as waiving fees or offering discounts, while still being profitable over the 8-year period

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    The document discusses calculating lifetime value (LTV) over 8 years for home alarm customers who use auto-pay versus those who don't. For new customers, LTV is $1373.66 for auto-pay vs $1064.87 without, so the maximum incentive budget is $308.79 per customer. For existing customers in their second year, LTV is $1436.88 with auto-pay vs $1107.94 without, allowing up to $328.94 in incentives per customer. Several marketing strategies are proposed to incentivize both new and existing customers to sign up for auto-pay, such as waiving fees or offering discounts, while still being profitable over the 8-year period

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    3K views4 pages

    Home Alarm Answers

    Uploaded by

    phoggydayal
    The document discusses calculating lifetime value (LTV) over 8 years for home alarm customers who use auto-pay versus those who don't. For new customers, LTV is $1373.66 for auto-pay vs $1064.87 without, so the maximum incentive budget is $308.79 per customer. For existing customers in their second year, LTV is $1436.88 with auto-pay vs $1107.94 without, allowing up to $328.94 in incentives per customer. Several marketing strategies are proposed to incentivize both new and existing customers to sign up for auto-pay, such as waiving fees or offering discounts, while still being profitable over the 8-year period

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    of 4

    Q1.

    (a) LTV (looking 8 years out) of a customer who will use auto-pay

    Q1. (b) LTV (looking 8 years out) of a customer who will not use auto-pay

    Please note that for both the calculations above:


    Revenue per year per customer, Variable cost, and Marketing cost increase at
    a standard rate of 3% per year after the first year.
    Customer profit = Total revenue Total cost
    % of customers active has been derived from the attrition rate which is
    provided to us. I have used retention rate (1 attrition rate) to calculate the % of
    original customers that remain active from Year 1 through Year 8.
    10% is used as discount factor.

    Q1. (c) The maximum amount that Home Alarm could spend on incentives to
    make new customers sign up with auto-pay = LTV of customers with auto-pay
    LTV of customers without auto-pay
    = 1373.66 1064.87 = $308.79 per customer
    Lets assume that Home Alarm signs up 10,000 new customers. We are told that
    37% of these customers opt for auto-pay without any incentives. The maximum
    budget for incentives for the remaining customers = 10,000 * 0.63 * 308.79 =
    $1,945,377
    Q1. (d) Home Arm could take the following marketing actions to sign up new
    customers with auto-pay:

    Waive off the installation charge of $195 if a customer chooses to opt for
    auto-pay. Since Home Alarm makes $308.79 more from a customer on

    auto-pay, it will still continue to make $308.79 - $195 = $113.79 more.


    Offer discount on monthly fee for the first two years of subscription. Offer
    a discount of $10 off the monthly fee for the first two years of service.
    This way the company will lose 2 * 12 * 10 = $240 in revenue. But it will

    still effectively earn $308.79 - $240 = $68.79 more per customer.


    Offer a gift voucher (like Amazon, eBay, Home Depot etc.) worth $200 at
    the time of sign-up. Home Alarm will still make $308.79 - $200 = $108.79

    more per customer.


    Since Home Alarm did not assign any marketing cost to the time of signup, it would be a good idea to do so to convince new customers to sign up
    for auto-pay. Assign $200 per person as the marketing budget. Net gain

    over the 8 year period = $308.79 - $200 = $108.79 per person.


    Hire a salesperson who would meet new customers and try to explain to
    them the benefits of choosing auto-pay. Say we hire this salesperson at a
    salary of $75,000 per year, it would cost us $75,000 * 8 = $600,000 over
    8 years (assuming no salary hike). We would still be within our budget of
    $1,945,377 (from Q1. (c)). In fact, we could hire three such salespersons.

    Q2. (a) LTV (looking 8 years out) of a customer who will use auto-pay

    Q2. (b) LTV (looking 8 years out) of a customer who will not use auto-pay

    Please note that for both the calculations above:


    Revenue per year per customer, Variable cost, and Marketing cost increase at
    a standard rate of 3% per year after the first year.
    Customer profit = Total revenue Total cost
    % of customers active has been derived from the attrition rate which is
    provided to us. I have used retention rate (1 attrition rate) to calculate the % of
    original customers that remain active from Year 1 through Year 8.
    10% is used as discount factor.

    Q2. (c) The maximum amount that Home Alarm could spend on incentives to
    convert such an existing customer to auto-pay = LTV of customers with auto-pay
    LTV of customers without auto-pay
    = 1436.88 1107.94 = $328.94 per customer

    Q2. (d) Home Alarm could consider the following marketing actions to convert
    existing customers who are just about to start their second year with Home
    Alarm to auto-pay:

    Offer discount on monthly fee for the next two years of subscription. Offer
    a discount of $10 off the monthly fee for the next two years of service.
    This way the company will lose 2 * 12 * 10 = $240 in revenue. But it will

    still effectively earn $328.94 - $240 = $88.94 more per customer.


    Offer a gift voucher (like Amazon, eBay, Home Depot etc.) worth $200 if
    the customer moves to auto-pay. Home Alarm will still make $328.94 -

    $200 = $128.94 more per customer.


    Offer a cash credit worth $150 as a one-time offer if an existing customer
    switches to auto-pay. Net gain = $328.94 - $150 = $178.94. Alternatively,
    offer cash credit worth $25 per year for the next 8 years. Net gain =
    $328.94 - $200 = $128.94.

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