Eastern Motors Auto Dealership wanted to estimate the average CLV over a 5 year time horizon of a customer who purchases a new vehicle. The average vehicle sells for $23,700 and has a margin of 11%. Based on historical averages, 78% of people buying a new vehicle at Eastern will return for service 10 times over the next 5 years. Though it varies considerably, Eastern generates approximately $103 in margin on each service visit after accounting for parts and direct labor costs. Required:
What is the total estimated CLV over a 5 year time horizon for someone who purchases a new vehicle at Eastern Motors?

The total estimated CLV over a 5 year time horizon for someone who purchases a new vehicle at Eastern Motors is $3,410.40.

Explanation:

Margin on selling vehicle = Average vehicle selling price * Margin = $23,700 * 11% = $2,607

Margin generated by 78% of people who return for service over 5 years = Number of times * Margin generated on each service = 10 * $103 = $1,030

Total estimated customer lifetime value (CLV) = Margin on selling vehicle + (Margin generated by 78% of people who return for service over 5 years * 78%) + (Margin generated by 226% of people who do not return for service over 5 years * 22%) = $2,607 + ($1,030 * 78%) + ($0 * 22%) = $3,410.40

Therefore, the total estimated CLV over a 5 year time horizon for someone who purchases a new vehicle at Eastern Motors is $3,410.40.