Price Elasticity Of (market) Demand And CLV

Question 1

Price elasticity of demand

Answer 1

(New sales - Previous sales) : Previous sales
/
(New price - Previous price) : Previous price

Price elasticity (ε) represents customer reactions and revenue changes to pricing decisions
It indicates whether price increase or discount strategies should be used by companies

e = -1 Proportional Elasticity: Price change of 1% results in demand reduction of 1%

e < -1 More than proportional elasticity: Price change of 1% results in demand
reduction of more than 1%

-1<e<0 Less than proportional elasticity: Price change of 1% results in demand
reduction of less than 1%

Elasticity depends on how easily a customer can refrain from consuming a product
In addition, elasticity varies according to the possibilities to substitute one product / service for another

Question 2

Customer Lifetime Value

Answer 2

The total gain expressed on a net present value basis that a business anticipates from having an
enduring commercial relationship with a client over time.

• Forward-looking analysis of the value which is derived between the present point in time and the potential end of the business
relationship with this customer
• CLV is used in decisions about how much should be invested to further maintain the customer relationship
• Customer is seen as an investment -> CLV concept uses established method of investment analysis

CLV represents sum of discounted profit contributions for the whole projected relationship of the
company with that customer

Question 3

Discount Interest Rate

Answer 3

1. Inflation Rate
   +
2. Risk Adjustment Factor

Difficulties to determine which criteria are really relevant; criteria maybe interdependent

Question 4

CLV Advantages

Answer 4

Future orientation -> relevant for decision-making

Can stimulate discussion and cooperation between Marketing and MA department

Question 5

CLV Disadvantages

Answer 5

Risk of application when data can actually not be estimated (value of individual key customers in unique customer relationships)

Neglects non-financial aspects of customer relationship (such as recommendations)