Assess Customer Value with Varied Contract Terms and Costs
Company: Capital One
Role: Data Scientist
Category: Analytics & Experimentation
Difficulty: medium
Interview Round: Onsite
##### Scenario
Network-service provider economics: assess customer value under different contract terms and cost structures.
##### Question
With revenue $40/month (first 3 months free), service cost $25/month, install cost $35, and marketing & overhead $120 per new customer, what is the net value of a customer on a 15-month contract (10 K acquisitions/year)? How does the net value change if the contract term increases to 18 months? Explain. If term = 21 months, 10 % churn incurs a $100 penalty, marketing cost falls to $20 variable plus $1 M fixed overhead, how many customers are needed to break even?
##### Hints
Lay out cash flows month-by-month, separate variable and fixed costs, include churn penalties.
Overview: Evaluates subscription contract unit economics across free periods, service costs, marketing costs, churn penalties, and fixed overhead. Strong answers compute customer value, portfolio value, and break-even acquisitions.
Subscription Network Service: Customer Value and Contract Terms
A subscription network-service provider wants to assess unit economics and portfolio impact under different contract terms and cost structures.
Assume no discounting, service cost applies in every active month including the free period, and revenue is 0inmonths1−3and40 per month from month 4 onward.
Constraints & Assumptions
Lay out cash flows month by month or by free versus paid periods.
Separate variable per-customer economics from fixed overhead.
Include install cost, marketing cost, service cost, revenue, and expected churn penalty where specified.
Round required customer counts up to whole customers.
Clarifying Questions to Ask Guidance
Are all customers retained through the full contract except the specified churn scenario?
Is marketing and overhead variable per customer or fixed?
Are taxes, support, collections, and discounting excluded?
Is the goal per-customer value, annual portfolio value, or break-even acquisition volume?
Part 1 - Base Case
For a 15-month contract, revenue is 40/monthwiththefirst3monthsfree,servicecostis25/month, install cost is 35one−time,andmarketing/overheadis120 per new customer. What is the net value per customer and total annual net value at 10,000 acquisitions?
What This Part Should Cover Guidance
Compute free-period cost, paid-month margin, and one-time costs.
Derive net value per customer.
Multiply by 10,000 acquisitions for annual portfolio value.
Interpret whether the base case creates or destroys value.
Part 2 - 18-month Contract
With the same costs, how does net value per customer change versus the 15-month contract?
What This Part Should Cover Guidance
Recompute paid months and contribution.
Compare incremental value from extending the contract.
Explain why longer contract terms improve value when monthly paid margin is positive.
Part 3 - 21-month Contract with New Costs
For a 21-month term, 10% churn incurs a 100penaltyinexpectation,marketingcostchangesto20 per new customer, and fixed overhead is $1,000,000. How many customers are needed to break even?
What This Part Should Cover Guidance
Compute per-customer contribution after service cost, install cost, variable marketing, and expected churn penalty.
Subtract or cover fixed overhead separately.
Solve fixed overhead divided by per-customer contribution and round up.
Explain sensitivity to churn and margin assumptions.
Follow-up Questions Guidance
How would discounting or churn timing change the calculation?
What if the free period increases conversion but lowers customer quality?
How would you compare contract value across customer segments?
