Bunch-by-Mail is a company that sells flowers online, 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. After the customer is acquired and makes the first purchase, a catalog is sent to him/her every month for a period of 60 months. When estimating the value of its customers, Bunch-by-Mail considers the first purchase as the acquisition stage and the 60 months that follow the first purchase the retention stage.

a. If we consider the first transaction as an integral 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 lifetime value (accounting for the acquisition cost) for each individual customer over the 60 months (assume a discount rate=0)?

d. Instead of using the database from FlowerLife magazine to acquire customers, the company is looking into a new online advertising campaign utilizing YouTube to bring customers to the company website. Once these You Tube customers make the first purchase, their name and address would 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 (same retention strategy mentioned before). 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. The acquisition response rate of the You Tube video is expected to be 0.25%.

d.1. how many customers need to be acquired to recover the cost of the video at the time of first transaction (assume that customers acquired from catalog mailings are not the same as those acquired through the online campaign)

d.2. how many people need to view the YouTube video to recover the cost of the video at the time of first transaction, (assume that customers acquired from catalog mailings are not the same as those acquired through the online campaign)?

d.3. 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, but once they are acquired from YouTube,, they are sent 60 catalogs over their lifetime)?

d.4. 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, but once they are acquired from YouTube,, they are sent 60 catalogs over their lifetime)?