Question
Diaper.com, an online retailer of diapers and other baby products, estimates that each of its existing consumers makes 10 purchases per year. 60% of these
Diaper.com, an online retailer of diapers and other baby products, estimates that each of its existing consumers makes 10 purchases per year. 60% of these purchases are for Pampies and the remaining are for Huggs. The unit contribution is $2.00 for Pampies and $1.00 for Huggs. Each year Diaper.com experiences a churn of 90% of its customer base (or 90% of its customers never buy its products again), presumably because its products are not relevant for babies over a certain age. What is the maximum (in $ per customer) the firm should be willing to spend on acquiring a customer? Use the concept of customer lifetime value to answer this question. Assume a lifetime of three years, and there are no other relevant costs and no discount rates.
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