Question

A firm has identified 3 segments of customers based on their frequency of purchase. Low frequency customers spend on average $100/year on the brand, medium frequency customers spend $380/year on the brand and high frequency customers spend $500/year on the brand. A new marketing campaign wants to target converting customers to higher levels of frequency. Based on their budget they are considering 4 strategies. Which strategy should they pursue if they want to increase revenue as much as possible?

a. Convert 20 customers from low to medium frequency

b. Convert 20 customers from medium to high frequency

c. Convert 25 customers from medium to high frequency

d. Convert 15 customers from low to medium frequency

Answer 1

Given values:

Low frequency customers = $100/year

Medium frequency customers = $380/year

High frequency customers = $500/year

Solution:

To find the maximum increase in revenue, let us evaluate each of the given strategy:

(a) Convert 20 customers from low to medium frequency:

Increase in revenue = Number of customers x Difference amount

Increase in revenue = 20 x ($380 - $100)

Increase in revenue = $5,600 (Highest)

(b) Convert 20 customers from medium to high frequency:

Increase in revenue = 20 x ($500 - $380)

Increase in revenue = $2,400

(c) Convert 25 customers from medium to high frequency:

Increase in revenue = 25 x ($500 - $380)

Increase in revenue = $3,000

(d) Convert 15 customers from low to medium frequency:

Increase in revenue = Number of customers x Difference amount

Increase in revenue = 15 x ($380 - $100)

Increase in revenue = $4,200

Answer: (a) Convert 20 customers from low to medium frequency because of highest increase in revenue.