Customer lifetime value

In addition to its riders, Uber's drivers can also be considered "customers" of its ride-sharing platform, because they generate streams of revenue and must be acquired. As such, Uber is considering a promotional campaign to acquire new drivers that will pay a $200 bonus to those who complete a sufficient number of rides within their first month.

Assume the following:

1. Only drivers who earn the $200 bonus count as "acquired drivers"
2. Acquired drivers generate:

• $800 in profit at the end of year 1
• $850 in profit at the end of year 2
• $900 in profit at the end of year 3

1. Uber pays the $200 bonus today, but its profits are realized at the end of the year.
2. Acquired drivers have no effect on profitability prior to receiving their $200 bonus at the end of the first month (i.e., assume $200 bonus is the only cash flow at t=0 and ignore everything before)
3. Uber uses a 4% discount rate
4. Uber believes that the probability of a driver being retained after receiving the bonus is as follows:

• 50% at the end of year 1
• 25% at the end of year 2
• 10% at the end of year 3
• 0% after that

1. If a driver is not retained, assume s/he generate $0 in revenues that year (e.g., a driver not retained at the end of year 1 generates no revenues at all the entire first year)

What is the customer lifetime value of an acquired driver?

(round to the nearest whole dollar at the end of your calculations)

Sample Solution