Question

1. Bosch is about to launch three new windshield wiper blades to the market: Envision, Icon, and Micro. Bosch expects to sell the wiper blades in the ratio 2:5:9 respectively. The prices of the blades will be $30, $23, and $13, and have variable costs of $7, $5, and $4, respectively. They plan to spend $2M in design, $4M in equipment and $50M to promote the new blades to acquire 20 million customers.
   1. Calculate the breakeven quantities for each wiper model. [3]
   2. Assume the replacement cycle for wiper blades is roughly a year, and the probability that these customers repurchase from Bosch the following year is 74%, 84%, 78% respectively, and the discount rate is 6% annually. Calculate the CLV for customers in each segment. (Hint: M = total contribution from part a. AC = FC/total number of customers) (Note: Just use the same AC for each segment) [6]
   3. Suppose the company is considering mailing out a $3 birthday coupon to encourage loyalty. What is the minimum retention rate for each segment required to maintain the same CLV found in part b (hint: rearrange the following formula in terms of r. M = total contribution from part a). [3]
   4. If the company is considering spending $40M next year targeted to an audience of 3 million customers, what would be the breakeven acquisition rate for each segment to justify spending $40M. (hint: calculate acquisition spending per customer and divide by CLVs from part b). [3]

Answer 1

The contribution from each blade is selling price - variable costs, or

30$ - 7$ = 23$ from Envision

23$ - 5$ = 18$ from Icon

13$ - 4$ = 9$ from Micro

The total fixed costs are $2M (design) + $4M (equipment) + $50M (promotion) = $56 M

a.

Now suppose, x quantities of Envision are sold, y quantities of Icon are sold and z quantities of Micro are sold and a total of n quantities are sold for achieving break even, Then

x + y + z = n (Equation 1)

It is given that sales of the blades will be in ratio of 2:5:9, therefore, x:y:z = 2:5:9

then, x = 2*n /( 2+5+9) = 2*n/16 (Equation 2)

y = 5*n /( 2+5+9) = 5*n/16(Equation 3)

z = 9*n /( 2+5+9) = 9*n/16 (Equation 4)

Also, to break even, the total contribution from all the blades must be equal to the fixed cost incurred

i.e. x*23 + y*18 + z*9 = $56 M (Equation 5)

Substituting Equation 2, 3 & 4 in Equation 5, we have

2*n/16 * 23 + 5*n/16 * 18 + 9*n/16 * 9 = $56 M

or 46n/16 + 90n/16 + 81n/16 = $56 M

or 46n+90n+81n = $56 M * 16

or 217n = 896M

or n = 4.129 M

From Equation 2, 3 and 4

x = 2*n/16 = 2*4.129 /16 M = 0.5161 M

y = 5*n/16 = 5*4.129 /16 M = 1.2903 M

z = 9*n/16 = 9*4.129 /16 M = 2.3226 M

Therefore, the breakeven quantifies are 51610 of Envision, 129030 of Icon and 232260 of Micro

b. AC= Acquisition cost per customer = Amount spent to acquire customer/ total number of customer = $50M / 20M = 2.5$

Contribution from each segment is 23$ from Envision, 18$ from Icon, & 9$ from Micro

For Envision segment

Year 0 = -2.5$ acquisition cost

Year 1 = 23$ contribution / 1.06 (discount factor) = $ 21.70

Year 2 = 23$ * 0.74 retention / 1.06^2 (discount) = $ 15.15

and so on...

Total = 71.87-2.5 = 69.37$

For Icon Segment

Year 0 = -2.5$ acquisition cost

Year 1 = 18$ contribution / 1.06 (discount factor) = $ 16.98

Year 2 = 18$ * 0.84 retention / 1.06^2 (discount) = $ 13.46

and so on...

Total = 81.79-2.5 = 79.29$

For Micro Segment

Year 0 = -2.5$ acquisition cost

Year 1 = 9$ contribution / 1.06 (discount factor) = $ 8.49

Year 2 = 9$ * 0.78 retention / 1.06^2 (discount) = $ 6.25

and so on...

Total = 32.14-2.5 = 29.64$

Therefore, the CLV of each model is 69.37$ for Envision, 79.29$ for Icon and 29.64$ for Micro.

c. The contribution from each segment reduces by the cost of birthday coupon, i.e. the contribution is now 20$, 15$ and 6$ for Envision, Icon and Micro respectively.

To have the same CLV, the retention rate should be increased such that additional 3$ is added to the CLV.

Solving using the method illustrated in b, we have 78.17% for Envision, 87.69% for Icon and 87.36% for Micro.

d. Acquisition spending by each customer = $ 40M/ 3 M = 13.33 $

Breakeven acquisition rate for each segment = 13.33/69.37 for Envision, 13.33/79.29 for Icon and 13.33/29.64 for Micro or

19.22%, 16.82% or 44.98% respectively.