Question: 1. You are a small specialty coffee grower that sells one product-your "regular" coffee-for $25/ton. Each year your company sells 4,000 tons of regular coffee (each ton of regular coffee could make 1,000 ounces of brewed coffee). The variable costs to make your regular coffee are $20/ton. You are considering adding one more product to your product offerings-a premium coffee you intend to market under the Premo brand name, and you are considering three pricing strategies for the Premo brand. The contribution margin for Premo will be 25%.
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Premo price options
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Premo expected demand
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Impact on other products
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$28/ton
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2,000 tons
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For every 1 ton of Premo sold, 1 ton of "regular" coffee would not be sold
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$30/ton
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1,600 tons
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For every 2 tons of Premo sold, 1 ton of "regular" coffee would not be sold
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$32/ton
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1,200 tons
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For every 3 tons of Premo sold, 1 ton of "regular" coffee would not be sold
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a. At which price point should you sell Premo if you are trying to maximize contribution dollars?
b. At which price point should you sell Premo if you are trying to maximize revenue?
c. Suppose you introduce Premo at the $28/ton price point. If each ton of Premo coffee makes 500 ounces of brewed coffee, after the release of Premo, what is the weighted average price per 12 ounce cup of your brewed coffee (both Premo and regular)?
d. A friend recently approached you with the idea that you should sell travel coffee mugs and t-shirts (both have a unit contribution of $3) to make up for potential losses in sales (and contribution dollars) resulting from adding Premo to your product portfolio. Do you think your friend's idea is a good one? Explain.
2. Now suppose you sold your coffee production business and decided to use your coffee industry contacts to start a "coffee of the month club" online business that delivers different coffee beans to customers each month for a membership fee of $14 per month.
a. Assume your variable costs are $.70 per customer per month and you spend $.80 per month per customer on customer loyalty programs designed to retain customers. Currently, your monthly retention rate is 68% and you have 100 customers. If you have a monthly discount rate of 4%, what is your CLV?
c. Now suppose you want to increase your monthly retention rate by 2%. How much money will you be able to spend on each customer per month in order to raise the monthly retention rate by 2% and keep constant the CLV?