Question

The marketing manager at the Magazine Company suggests a new customer acquisition strategy with customer acquisition cost of $15. The strategy basically is to offer $15 discount to the new customers. This discount is only for the first year, and the fee is going to jump to the regular fee for the following years. Assume that this strategy does not have any effect on retention rate and contribution margin for each customer. Is this strategy worth pursuing? In other words, does this strategy generate more value for the company?

yes or no? briefly explain.

Answer 1

Answer:

This strategy will generate more value for the company and so it is worth pursuing this strategy.

Reason:

It is given that this strategy basically is to offer $15 discount to the new customers only for the first year, and the fee would be jumped to the regular fee for the following years. Also, this strategy would not have any effect on retention rate and contribution margin for each customer.

From the above lines it is clear that though discount of $15 to a new custmer is not going to help firm to generate a good customer database for future benefits, it would increase firm's oveall contribution margin when # new customers is increased as this strategy does not have any effect on current contribution margin. In simple words, new customers will purchase firm's products as a fresh customer to avail $15 discount and jump to another product in subsequent years which offers them discount. As a result, firm tends to earn current contribution margin per new customer sale. It will have positive impact on firm's overall contribution margin as this strategy does not affect contribution margin for each customer.

Anyway, firm will attract more new customers each year by allowing discount of $15 and even if the customers are not purchasing firm's products during subsequent years, fresh new customers will walk-in and purchase firm's products to avail $15 discount for sure. Though customers enjoy $15 discount, it is not going to affect firm's contribution margin per customer and so it is not a loss to the firm.