Exercise 1: Record Store Richard is the director of marketing for DiVinyls Collectibles that deals in hard to find new and used records. It is a direct-mail music operation that sells records via mailed catalogs to hard-core audiophiles. He wants to better understand the lifetime value of the customers who buys music from his so he can determine if he should implement specific marketing initiatives. Richard would like to calculate the 3-year lifetime value of a new cohort of customers he has recently acquired based on the accounting information he has below: The average customer spends $450 per purchase. The gross margin associated with these sales is 65% (high due to acquisition costs). The cost to ship each purchase (a bundle of records and appropriate packaging) is $25.00 that the customer pays. Divinyls Collectibles only accepts checks and money orders; no credit cards are accepted. Orders are place by returning a pre-paid ordering envelop and return postage is included as part of the mailing costs of the monthly catalogs. Thus, no additional expenses and profits are incurred with respect to shipping and handling. The average audiophile customer buys from the catalogs roughly 8 times a year. The average cost of mailing the catalogs is $20 per customer per year. With respect to acquisition costs, the response rate for sending catalogs to a new customer base is 2%. Customer retention is about 75% from one year to the next. The discount rate is 10%. Please submit the following: Please state any additional assumptions necessary and create the CLV model in Excel. Calculate a typical customer's CLV. [5 point] Propose one change (adjusting one or more existing assumptions) that can increase CLV. Create a second model to demonstrate in increase. [5 point] Exercise 2: Blockbuster! It's 1994, and you are one of the brand managers for Blockbuster Video (remember those?). You are interested in whether a 3-year marketing campaign centered on extended weekend rentals for "Preferred" clients would be profitable. Based on field tests in select markets, giving Preferred membership customers a weekly coupon for the latest blockbusters seems to increase the number rentals over the weekends if the key titles are adequately stocked. The average Preferred customer rents 2 old titles at $1.99 and 1 blockbuster title for $4.99 each week. The data suggest that customers will rent TWO additional blockbuster movies over the weekend when given a $2.00 discount per weekend blockbuster title. Thus, each customer rents on average 2 old titles (at $1.99), 1 blockbuster title during the week (at $4.99), and at least 2 discounted blockbuster titles (at $2.99) over the weekend. Each store on average hosts an average of 3,000 Preferred customers from the surrounding area. Further, these customers are very loyal and retention based on yearly rental records is about 95%. Acquisition cost associated with the Preferred membership is approximately $100 per customer. The discount rate for the industry is about 17%. The company's average gross margin is 34%. osts associated with the Preferred membership customer appreciation program include: o fixed marketing expenses (weekly direct mailings, local newspaper inserts targeting those with Preferred membership cards, emails, and communication) are about $3,500 per week; and o fixed marketing cost to continually train employees (high turnover) that is about $200 per week. Please submit the following: Identify and list all assumptions necessary and create the CLV model in Excel. [5 points] Answer and explain: Is this a good venture? Why or why not? [5 point]
