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Question 2

Redeye Inc. is a successful, medium-sized operation that markets two products - widgets and pidgets. The companys management is considering expanding its customer base. The firm thus hires a marketing consultant to prepare some estimates for the establishment. Below are the estimates prepared by the consultant:

The amount of new customers: 2,222

Projected yearly retention rates are:

Yr 0	Yr 1	Yr 2	Yr 3	Yr 4	Yr 5
90%	60%	70%	80%	90%	100%

Projected acquisition costs (per customer): $1,000

Yearly retention costs (per customer): $185

Desired rate of return: 25%

The campaign will run for one year (Year 0)

The Present Value Interest Factors (PVIF) based on a 25% rate of return are:

	Yr 0	Yr 1	Yr 2	Yr 3	Yr 4	Yr 5
PVIF (20%)	1.000	0.800	0.640	0.512	0.410	0.328

The consultant also indicates to management that she expects all the operating revenue and costs patterns to be the same for these acquired customers as for those already serviced. Based on historical patterns the average customer buys 10 widgets and 5 pidgets per year. One widget sells for $50, while a pidget sells for $30. Historically, a widget costs the company 50% of the selling price and a pidget 60%. From year three (3) widgets costs will go to 55% and pidget costs to 65% of their respective prices. Based on the company records, defecting customers are expected to default on their bills, so the establishment will incur yearly bad debts of 15% of the revenue from widgets and 20% of that from pidgets. These bad debts are recognised in the same year in which the customers default.

It has been found that 20% of customers make referrals to the establishment yearly. The value of these referrals is calculated as a one-time amount that is directly attributed to the profits. Based on historical data each person referred purchases 5 widgets and 6 pidgets a year. The referrals do not incur any bad debts.

Based on the above information, management of Redeye Inc. asks you to calculate the per customer CLTV in dollars and to give a brief recommendation concerning the feasibility of the program.

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