Bunch-by-Mail is a company that sells flower bouquets by mail, in collaboration with a well-known mail carrier. Every month, the company produces a new catalog, and mails it to new prospects and old customers, in an attempt to generate orders. The cost (production and mailing) of each catalog is 25 cents. On average, 1% of new prospects place an order when they receive a catalog. In contrast, 5% of past customers place an order when they receive a catalog. A typical order has a price of $60 and the associated cost of flowers and delivery is $42. Bunch-by-Mail is offered the opportunity to mail its catalog to 1,000 new prospects using the database of FlowerLife magazine. By contract, Bunch-by-Mail would pay $10 for the entire list and be allowed to use the database once, to ship one catalog to all 1,000 prospects on the list. Once a prospect responds by placing an order, his/her name and address can be added to the list of Bunch-by-Mails existing customers, and such contact information can then be used in the future at no additional cost. Once a customer is acquired in this manner, a catalog is sent to him/her every month for a lifespan of 60 months.

a. If we consider the first transaction as part of the customer acquisition stage, what is the acquisition cost per customer generated from the FlowerLife database?

b. Going forward, after they have made the first purchase, for each customer, what is the expected cumulative margin, inclusive of the catalog production and mailing costs incurred in each mailing cycle, over the 60 months of customer lifetime (assume a discount rate=0)?

c. What is the overall lifetime value (accounting for the acquisition cost) for each individual customer over the 60 months (assume a discount rate=0)?

d. The company is looking into a new online advertising campaign utilizing YouTube to acquire new customers. Once acquired, the name and address of these YouTube customers shall be added to the list of Bunch-by-Mails existing customers, and a catalog will be sent to them every month for the usual lifespan of 60 months. The video will describe the company and its products. It would relate warm and quirky stories of consumers experience in giving and receiving flowers from their loved ones. The one-time production and hosting cost of the video is $10,000. Assuming the acquisition response rate to the viral video is one-fourth of the 1% observed from the catalog:

(i) how many customers need to be acquired to recover the cost of the video immediately at the time of first transaction, i.e., the customer acquisition stage (assume that customers acquired from catalog mailings are not the same as those acquired through the online campaign)?

(ii) how many people need to view the YouTube video to recover the cost of the video immediately at the time of first transaction, i.e., the customer acquisition stage (assume that customers acquired from catalog mailings are not the same as those acquired through the online campaign)?

(iii) how many customers need to be acquired to recover the cost of the video over the 60 month customer lifetime (assume that customers acquired from catalog mailings are not the same as those acquired through the online campaign)?

(iv) how many people need to view the YouTube video to recover the cost of the video over the 60 month customer lifetime (assume that customers acquired from catalog mailings are not the same as those acquired through the online campaign)?