Assess Customer Value with Varied Contract Terms and Costs

Q: Assess Customer Value with Varied Contract Terms and Costs

This question evaluates a candidate's ability to model unit economics, customer lifetime value, cohort cash flows, and break-even analysis under varying contract lengths, costs, and churn impacts.

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Question

Scenario

A subscription network-service provider wants to assess unit economics and portfolio impact under different contract terms and cost structures.

Assumptions for clarity:

No discounting (time value of money ignored).
Service cost applies in all active months, including the free period.
Revenue is $0 in months 1–3 and$ 40/month from month 4 onward.

Question

Base case (per-customer and at 10,000 acquisitions/year):

Revenue: $40/month with the first 3 months free.
Service cost: $25/month.
Install cost: $35 (one-time).
Marketing and overhead: $120 per new customer (variable).
Contract term: 15 months.

What is the net value per customer? What is the total annual net value at 10,000 acquisitions?

Contract extended to 18 months (same costs as above):

How does the net value per customer change versus the 15-month contract? Explain briefly.

Contract term 21 months, with churn penalty and new marketing mix:

10% churn incurs a $100 penalty (expected cost).
Marketing cost changes to $20 per new customer (variable) plus$ 1,000,000 fixed overhead.

How many customers are needed to break even?

Hint: Lay out cash flows month-by-month, separate variable and fixed costs, and include churn penalties.

Assess Customer Value with Varied Contract Terms and Costs

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Assess Customer Value with Varied Contract Terms and Costs

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