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.