Reference no: EM132489225

Question - A coffee house chain spends $15 to acquire a new customer by offering a loyalty card which contains a $15 credit toward coffee purchases in the first year. The customer only needs to register their name and contact information in order to receive this loyalty card worth $15. Once the $15 is spent using the loyalty card, the customer can add their own money to the card using their credit card. There are no costs to the customer for registering into the loyalty program or for using the card. By using the card the customer receives a free cup of coffee on their birthday. The coffee house chain has found that the average life of their customer relationship is 4 years. The average revenue produced by each customer on an annual basis for each of the 4 years is $1,000 per year. In the first year, the $1,000 annual revenue does not include the initial $15 placed on the card by the coffee house chain. That initial $15 value cannot be considered revenue. The average cost of goods sold per customer on an annual basis for each of the 4 years is $600 per year. This includes the cost of the free cup of coffee for the customer's birthday. Interest rates remain at 3% for each of the 4 years.

Required - Calculate the Customer Lifetime Value using the NPV approach.