The ABC company makes a product for $5. marketing research revealed that direct mailing of a product sample is very effective in creating loyal customers. in addition to the unit cost of the sample of $3, there is a $1 shipping/handling cost associated with the mail out. one in 4 recipients of thee sample is expected to become a loyal customer. The company plans to send a $1 coupon to these customers each year to maintain loyalty - postage and handling for the coupon is $0.50. Research further revealed that these customers purchase 6 units of the companys product each year and do not buy competing products. however, each year 10 % switch to competitor's products and then only purchase the competitors. 1. What is the acquisition cost of a customer? show calculations 2. What is CLV of an already acquired customer? show calculations 3. Is the commpanys acqusition strategy sound? Explain.
The ABC company makes a product for $5. marketing research revealed that direct mailing of a product sample is very effective in creating loyal customers. in addition to the unit cost of the sample of $3, there is a $1 shipping/handling cost associated with the mail out. one in 4 recipients of thee sample is expected to become a loyal customer. The company plans to send a $1 coupon to these customers each year to maintain loyalty - postage and handling for the coupon is $0.50. Research further revealed that these customers purchase 6 units of the companys product each year and do not buy competing products. however, each year 10 % switch to competitor's products and then only purchase the competitors. 1. What is the acquisition cost of a customer? show calculations 2. What is CLV of an already acquired customer? show calculations 3. Is the commpanys acqusition strategy sound? Explain.
Chapter1: Financial Statements And Business Decisions
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Transcribed Image Text:The ABC company makes a product for $5. marketing research revealed that direct mailing of a product
sample is very effective in creating loyal customers. in addition to the unit cost of the sample of $3, there is
a $1 shipping/handling cost associated with the mail out. one in 4 recipients of thee sample is expected to
become a loyal customer. The company plans to send a $1 coupon to these customers each year to
maintain loyalty - postage and handling for the coupon is $0.50.
Research further revealed that these customers purchase 6 units of the companys product each year and
do not buy competing products. however, each year 10 % switch to competitor's products and then only
purchase the competitors.
1. What is the acquisition cost of a customer? show calculations
2. What is CLV of an already acquired customer? show calculations
3. Is the commpanys acqusition strategy sound? Explain.
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Follow-up Question
The calculation is still wrong, as the COGS is not given taking $5 as a product cost will not answer. and adding the shipping cost of the coupon will not justify the answer for the acquisition cost.
1) Acquisition cost = 3(Sample cost) + 1(Shipping and handling) = $4
1 out of 4 getting converted to loyal customer = $4*.25 = $16
CLV = Gross margin * (1 + discount rate) / (1 + discount rate + retention rate)
Revenue = $5*6 = $30
Gross margin = as the COGS is not given it will be hard to calculate, we can take sample cost as the cost of product and $1 for shipping
finally, Gross margin = 30 - {3 (Sample cost/Product cost) + 1 (Shipping)} *6 times - 1(coupon) - 0.5 (Shipping of coupon)
= 30 - 4*6 -1 - 0.5
=30 -24 - 1.5
=$4.5
I am still getting stuck at the gross margin provided by you as subtracting only 1 product cost seems to be wrong.
Solution
by Bartleby ExpertFollow-up Question
how come the CLV will be this,
"CLV = ($30 * $24) / (1 + 0.1 - 0.9) = $72" Calculation is wrong
Solution
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