Based on the CD's operation, Answer the following: (a) In light of Ravi Sinha's opinion that a business must be able to know the net profit…

(a) 6 (a) Steps to ascertain the customer lifetime value of a particular customer CD needs to ascertain the profits generated from each customer. Activity Based Costing (ABC) model helps in associating direct costs and revenues to a particular customer over a period of time to ascertain the profit margin from that particular customer. To ascertain lifetime value, judgment with regard to duration of customer relationships have to be made. These require detailed analysis of the strengths of relationships, the likelihood, frequency and amount of repeated or additional purchases, competitive products, customer loyalty etc. Thus, profit margins are then discounted at the firm's cost of capital or any rate that may be determined by the organization to arrive at the customer lifetime value. (b) Lifetime value of “Good customer” aged 20 years A customer aged 20 years will buy 5 bikes from CD. A new bike is bought every five years. Therefore, a new bike will be bought from the ages 20 years – 25 years, 25 years to 30 years, 30 years to 35 years, 35 years to 40 years and once more at 40 years driven upto an average of 40 year 3 months. Profit margin from the sale of 1 bike = 25% of 6,00,000 = 1,50,000 per bike. Profit margin from service / maintenance charges of 1 bike = 50% of 1,00,000 = 50,000 per bike. Total profit margin from sale of 1 bike = 1,50,000 +50,000 = 2,00,000 per bike. Total profit from sale of 5 bikes = 2,00,000 × 5 = 10,00,000. Therefore, the lifetime value of "good customer” aged 20 years is 10,00,000. (c) Lifetime value of "Excellent customer” aged 25 years. An excellent buyer on an average would buy 7 bikes from CD. Service and maintenance charges are incurred every year. The customer is expected to ride bikes until the age of 40 years and 3 months. Accordingly, CD would provide service and maintenance for 15 whole years (40 years – 25 years) and in the 16th year the service would be given for 3 months. Therefore, service and maintenance is provided for a total of 15.25 years. Profit margin from sale a bike = 30% of 9,00,000 = 2,70,000 per bike. Profit margin from service / maintenance charges of 1 bike = 60% of 1,20,000 = 72,000 per year. Profit margin from sale of 7 bikes = 2,70,000 per bike × 7 bikes = 18,90,000. Profit margin from service / maintenance for 15.25 years = 72,000 × 15.25 years = 10,98,000. Total profit earned (customer lifetime value) from "excellent customer" aged 25 years is 29,88,000. (d) Brand endorsement decision involving outlay of 25crore. Lifetime value of Good customer, who is aged 30 years: A "good customer” aged 30 years would by 3 bikes from CD. (30 years to 35 years, 35 years to 40 years and once more at 40 years driven upto an average of 40 years 3 months of age). As mentioned in (b) above, the profit margin from sale of 1 bike = 2,00,000 per bike. Therefore, the profit margin from sale of 3 bikes = 6,00,000, this is the customer lifetime value of "good customer” aged 30 years. Lifetime value of Excellent customer, who is aged 30 years: An "excellent customer” aged 30 years would buy 7 bikes in all from CD. The service and maintenance for these bikes will be required for 10.25 years (40.25 years – 30 years). As mentioned in (c) above, the profit from sale of 7 bikes = 18,90,000. Profit from providing service and maintenance for 10.25 years = 72,000 × 10.25 = 7,38,000. Therefore, customer lifetime value of "excellent customer" aged 30 years = 18,90,000 +7,38,000 = 26,28,000. Net Incremental benefit from converting good customer into excellent customer, who is aged 30 years: The differential / incremental profit on converting 1 customer aged 30 years from “good category” to “excellent category” would be - 26,28,000 -6,00,000 = 20,28,000 per customer. Therefore, the incremental profit on converting 500 customers aged 30 years from "good category” to “excellent category" = 20,28,000 × 500 customers = 101,40,00,000 (101.4 crores). The cost of hiring Formula 1 racing icons for brand endorsement = 25,00,00,000. Therefore, the net incremental profit earned as a result of the brand endorsement = 76,40,00,000. Therefore, the management can consider the brand endorsement program as it yields an incremental profit of 76.40 crores.