Question

Assumption:

1. The acquisition cost for each new customer is $35.

2. Each customer will purchase five times a year. For each purchase, the profit value is $8.

3. Retention rate (r) is 80% and Interest rate (i) is 4.5%.

Questions:

Note: Please round up all answers to the nearest tenth (two digits after the decimal point).

(1) Please fill out the empty cells in the table below. And write down all the detailed calculation steps.

(2) In order to make profit from this program, how many years do you think that the customers should stay in this program? Please simply explain why.

(3) Assuming that the retail store can attract 350 customers after it launches the frequent shopper program, and be able to keep this amount of customers till the end of year 4. The owner plans to achieve $3,000 cumulative profits at the end of year 4. Do you think, with 350 frequent shoppers, can the store owner accomplish the $3,000 goal? If not, how many more customers the retail store should recruit and keep till the end of year 4?

Frequent Buyer	Year 0	Year 1	Year 2	Year 3	Year 4
Acquisition Cost	$35	--	--	--	--
A. Margin on each purchase(5 times a year)	--	$8	$8	$8	$8
B. Survival Rate	--	100%	80%
C. Cost of Mailing(per month)	--	$2	$2	$2	$2
D. Total Expected Profit per Customer	--	$16 $8*5-$2*12=$16
E. Net Present Value	--	$15.31 16/(1+4.5%) =15.31
F. Cumulative Profit per Customer	--	15.31-35 = -19.69

Answer 1

1
Frequent Buyer	Year 0	Year 1	Year 2	Year 3	Year 4
Acquisition Cost	$35	--	--	--	--
A. Margin on each purchase(5 times a year)	--	$8	$8	$8	$8
B. Survival Rate	--	100%	80%	64%	51.20%
				80% of Rate Previous year	80% of Rate Previous year
C. Cost of Mailing(per month)	--	$2	$2	$2	$2
D. Total Expected Profit per Customer	--	$16	$12.80	$10.24	8.19
		$8*5-$2*12=$16	($8*5-$2*12)*80%	($8*5-$2*12)*64%	($8*5-$2*12)*51.2%
E. Net Present Value	--	$15.31	$11.72	$8.97	$6.87
		16/(1+4.5%)	12.8/(1+4.5%)^2	10.24/(1+4.5%)^3	8.19/(1+4.5%)^4
		15.31	11.72	8.97	6.87
F. Cumulative Profit per Customer	--	15.31-35	11.72-19.69	8.97-7.97	6.87+1
		-19.69	-7.97	1	7.87
2
In order to make profit from this program the customers should atleast stay in program till year 3
3
Cumulative Profit at the end of year 4 per customer	7.87
Cumulative Profit for 350 customers at the end of Year 4	2754.5
No of Customers required to achieve $3000 goal	Target / Profit per customer
	3000/7.87
	382
The Store would not be able to keep its target of $3000 with 350 customers. In order to achieve its target store would have to recruit atleast 382 customers.