Reed Supermarkets

Reed Supermarkets can better understand their customer segments by calculating the Consumer Lifetime Value (CLV) for an average household in their segments.  Two specific segments, “foodies” and “families” are worth analyzing from a CLV perspective to determine where Reed Supermarkets should focus its efforts to acquire new customers through promotions, mailing catalogs, or other means.  The higher the CLV, the more profitable it is on a per-unit basis for Reed to target that segment.  However, potential aggregate profits should be considered to determine market potential by factoring in the population of that segment as a whole.  

Foodies: Reed has a 23% gross margin on purchases in this segment which average $180 per month per household, or $180 x 12 = $2160 per year.  Thus, M = margin per year = 23% x $2160 = $496.8; The average cost c of loyalty rewards aimed at this target is given as $95 per year per household; The retention rate of this segment is 72%; finally, the acquisition cost of acquiring a new foodie household costs Reed $110.  Plugging into the above formula (ignoring the discount rate), we can determine the CLV for foodies at Reed Supermarkets:

Families: Reed has a 10% gross margin on purchases in this segment which average $80 per month per household, or $80 x 12 = $960 per year.  Thus, M = margin per year = 10% x $960 = $96; The average cost c of mailing coupons aimed at this target segment is given as $55 per year per household; The retention rate of this segment is 38%; finally, the acquisition cost of acquiring a new foodie household costs Reed $25.  Plugging into the above formula (ignoring the discount rate), we can determine the CLV for families at Reed Supermarkets: