Maryhas a small jewelry business that sells a line of high-end custom jewelry via prestigious women's catalogs. She wants to better understand thelifetime value of the customers who buy her jewelry so that she can determine whether she should implement specific marketing initiatives aimed at increasingtheretention rate of someportion of her customer base.
a.The average customer spends $250 per purchase.
b.The gross margin associated with these sales is 40%, therefore the average profit from each customer purchase is $100.
c.The average customer buys from the catalog 4 times per year.
d. The average cost of mailing the catalogs is $9.60 per customer per year and if you divide that by the response rate of 2% you get $480 to acquire a new customer.
e.Mary loses just over one-third of her customers each year, so her average retention rate is 65%.
f.The discount rate for the time value of money is 10%.
Based on the information above, what is the CLV of a customer over a five year period.
Cost-Based Pricing
You are selling a product in a market estimated to be 500,000 (units) in total. According to how you stack up with your competitors, your marketing department estimates that your firm should be able to capture 15% of the market estimate - they want to use that number as their sales estimate. Your variable cost for the item you are selling is $15.00 per unit, and fixed costs amount to $250,000 annually. You would like to sell the item at a 20% target profit (i.e. you want a 20% return on each item you sell).
a. What is the volume you must sell in order to break-even?
b. This is a price elastic product so that as price goes up by $3.00 per unit, expected demand (or sales) comes down by 30,000 units; as price go down by $3.00 per unit, expected demand (or sales) goes up by 15,000 units. I have put the expected demand (or sales) in column three below.
Put the answers that you just calculated in part (a) above for price, break even amount, and expected unit demand (or sales) into the shaded line for the first three columns below. Then based on what I just said about how the price relates to demand, fill in the rest of the prices in the first column (just add or subtract $3.00 from the price you put in the shaded line) and then complete the chart and answer (c) below.
c. Which selling price is the best and why?
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Price
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Unit Demand Needed to Break Even
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Expected Unit Demand (or Sales) at Given Price
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Total Revenue
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Total Costs
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Profit or Loss
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105,000
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90,000
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45,000
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15,000
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