Verizon is trying to determine the value of a cell phone subscriber in Bloomington, Indiana, and the
Question:
Verizon is trying to determine the value of a cell phone subscriber in Bloomington, Indiana, and the optimal levels of acquisition and retention spending. Currently Verizon has 20,000 customers and 30,000 potential cus- tomers. You are given the following information: Profits are discounted at 10 percent per year. Annual profit per customer is $400. Currently Verizon is spending $12 per prospect on acquisition and capturing 4 percent annually of prospective customers. Currently Verizon is spending $30 per customer on customer retention and has a retention rate of 75 percent. Verizon believes that with a saturation level of spending, the annual acquisition rate would increase to 10 percent and the annual retention rate would increase to 85 percent.
a. Determine the value of a customer and the profit maximizing annual level of acquisition and retention spending.
b. Use Solver Table to determine how the optimal level of retention and acquisition spending in Exercise 1 varies with an increase in annual profit.
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