Question
A regional electrical distributor currently has 1,000 customers who buy an average of $5,000 per year, generating a 50% margin. From experience, the company knows
A regional electrical distributor currently has 1,000 customers who buy an average of $5,000 per year, generating a 50% margin. From experience, the company knows that 20% of its customers will not return the next year and it takes an average of $500 to acquire each new customer.
Given a choice of 1) investing $50,000 in a new customer acquisition program for 100 additional customers or 2) investing $50,000 in a new retention program which would take the rate of retention from 80% to 85%, what should the company do? complete the Excel template for both scenarios (customer acquisition and customer retention) to show which option is the most profitable. Assume the new programs are in effect and you are calculating the impact for both beginning Year 1. Also, do not account for the cost of the programs since it doesn't impact the overall conclusion.
| Five Year Payout | ||||||
| Scenario 1: New Customer Acquisition | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| Incremental Customers: | 100 | |||||
| Purchases: | ||||||
| Additional Annual Profits: | ||||||
| Cumulative Additional Annual Profits: | ||||||
| Scenario 2: Customer Retention | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| Retained Customers @ 80%: | 800 | |||||
| Retained Customers @ 85%: | 850 | |||||
| Additional Retained Customers: | ||||||
| Incremental Annual Purchases: | ||||||
| Additional Annual Profits: | ||||||
| Cumulative Additional Annual Profits: | ||||||
| Conclusion: |
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