MGT 215 Module 2 Customer Lifetime Value Example

What a Dog Owner Is Worth: Customer Lifetime Value and Where a Daycare Chain Should Spend on Marketing

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Business Administration Program, Aspen University

MGT 215: Customer Relationship Management

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Month Day, Year

What a Dog Owner Is Worth: Customer Lifetime Value and Where a Daycare Chain Should Spend on Marketing

Happy Tails Dog Care, a composite company, operates six dog daycare and boarding centers in and around Columbus, Ohio. Dogs spend weekdays playing in supervised groups while owners work, and stay overnight when owners travel. The company spends about $180,000 a year on marketing, divided roughly equally among local radio, social media advertising and first-visit discounts that bring in all kinds of customers. The owners suspect some customers are worth far more than others and want to know where their marketing money should go. This paper calculates customer lifetime value for three customer groups.

What Lifetime Value Measures

Gupta et al. (2004) argued that customers are assets whose value can be measured and that the value of a firm's customer base can even approximate the firm's value. They defined a customer's value as the present value of the margins the customer will generate in future periods, multiplied by the probability that the customer is still active in each period. Three inputs drive it: the annual margin a customer contributes after the cost of serving them, the retention rate, the chance a customer stays from one year to the next, and the discount rate that converts future margins to today's value.

Three Customer Groups

Happy Tails' records identify three groups. Weekday regulars bring their dogs three to five days a week while they work; they spend about $4,200 a year, contributing about $2,080 in margin after staff, supplies and facility costs, and about 75% return each year. Boarding travelers use overnight boarding several times a year but rarely daycare; they spend about $1,150 a year, contributing $540 in margin, and about 55% return. Drop-ins use daycare occasionally, often after a discount; they spend about $420 a year, contribute about $180, and only about 30% return.

Calculating Value

Gupta and colleagues showed that, when margin and retention are steady, the value of a current customer's future margins equals annual margin multiplied by retention divided by one plus the discount rate minus retention. With a 10% discount rate, the multiple for regulars is 0.75 divided by 0.35, or about 2.14, so their value is $2,080 times 2.14, about $4,460. Boarding travelers have a multiple of 0.55 divided by 0.55, exactly 1.0, for a value of $540. Drop-ins have a multiple of 0.30 divided by 0.80, or 0.375, for a value of about $68. The table summarizes the results.

Are Regulars Really the Most Profitable

Reinartz and Kumar (2000), studying customers of a catalog retailer, found that customers who stayed longest were not necessarily the most profitable; some long-life customers bought less or cost more to serve, and some short-life customers were highly profitable. The finding is a caution against assuming loyalty equals value. At Happy Tails, the analyst checked whether regulars cost more to serve, for example through frequent requests for special handling or discounted multi-dog packages. Some do, but even regulars with two dogs at a discount contribute more margin than any boarding traveler. In this business, loyalty and profitability mostly align, but the check matters.

The Power of Retention

If Happy Tails raised regulars' retention from 75% to 80%, the multiple would become 0.80 divided by 0.30, or about 2.67, and their value would rise from about $4,460 to about $5,550, an increase of about 24%. Across the chain's 620 regulars, that would add roughly $675,000 of customer value. Reichheld and Sasser (1990) made the same point about services broadly: small cuts in defections produce large gains in profit, because loyal customers buy more and cost less to serve over time. A five-point gain among drop-ins would add little, because their margins are small.

What the Chain Can Afford

Lifetime value sets an upper limit on what the company should spend to acquire a customer. Happy Tails spends about $140 to acquire a regular and $60 to acquire a drop-in, but a regular is worth more than sixty times as much, and a drop-in's value of about $68 barely covers what it cost to win them. The first-visit discount, which draws mostly drop-ins, is the least efficient use of money; radio, which reaches commuters, and partnerships with large employers, which reach people who work long hours, are more likely to bring in regulars.

Recommendations

Happy Tails should shift about half of its first-visit discount budget toward attracting regulars, through partnerships with employers near each center and referral rewards for existing regulars. It should invest in retaining regulars with a staff member at each center who tracks their dogs' needs, sends daily photo updates and calls owners who reduce visits. For boarding travelers, it should promote holiday booking early. Drop-ins should be served well but not targeted with discounts.

Limits of the Analysis

The calculation rests on simplifying assumptions. It treats margin and retention as constant, while a regular whose dog ages may reduce visits, and a boarding traveler may become a regular after a job change. Gupta and colleagues acknowledged that their simple model ignores such shifts and the value customers create through referrals. Referrals likely matter at Happy Tails, since owners often choose daycare on a neighbor's advice, so the regulars' true value may be higher than shown. The 10% discount rate is also a judgment; a higher rate would lower all three values but would not change their order. Finally, the margins come from average costs per group, and a more precise analysis would assign staff time to individual dogs. The broad finding survives these caveats, because the gap between groups is far larger than any reasonable error in the inputs.

Measuring Progress

The chain should track the number of regulars, their annual retention rate, acquisition cost per regular and the share of revenue from regulars each quarter.

Conclusion

Customer lifetime value shows that a weekday regular is worth more than sixty times a drop-in to Happy Tails, while current marketing spends almost as much on drop-ins. Research supports valuing customers this way and checking that loyalty means profitability. Redirecting marketing toward attracting and keeping regulars, where small gains in retention create large gains in value, should make the chain's spending far more productive.

References

Gupta, S., Lehmann, D. R., & Stuart, J. A. (2004). Valuing customers. Journal of Marketing Research, 41(1), 7-18. https://doi.org/10.1509/jmkr.41.1.7.25084

Reichheld, F. F., & Sasser, W. E., Jr. (1990). Zero defections: Quality comes to services. Harvard Business Review, 68(5), 105-111.

Reinartz, W. J., & Kumar, V. (2000). On the profitability of long-life customers in a noncontractual setting: An empirical investigation and implications for marketing. Journal of Marketing, 64(4), 17-35. https://doi.org/10.1509/jmkg.64.4.17.18077