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:
- Only drivers who earn the $200 bonus count as "acquired drivers"
- 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
- Uber pays the $200 bonus today, but its profits are realized at the end of the year.
- 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)
- Uber uses a 4% discount rate
- 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
- 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?
Sample Solution