Lucky you, you just joined Zappos. Big signing bonus. Lots of stock options. I'd tell you your title, but I think Zappos eliminated titles along with hierarchy. But I digress.

Your first responsibility: determine whether Zappos should sign an exclusive one-year advertising deal with Facebook.

Terms of the deal

At the launch of the one-year agreement, Zappos is expected to make an upfront payment of $18 million to Facebook. In addition, Zappos would spend an average of $50,000 per day on Facebook advertising for a full year.

In return, Zappos's brand would be featured exclusively and prominently on many of Facebook's pages for its target audience for one year. More specifically, Zappos expects to be present on 40% of its Facebook's targets' 30 million page views per day. Based on its testing history, Zappos expects 0.25% of every page view at Facebook would result in a visit to its own website for the entire year of this deal. Zappos also finds about .75% of the visitors to its site actually buy shoes and other merchandise.

WhileZappos customers' typical retention rate for is over 80%, management believes customers coming from the Facebook site will have a retention rate of only 72%.

A typical order is $150 and people generally buy 1 time each year.

Zappos' CFO is concerned that, with a 40% gross margin and 10% cost of capital, this deal may not be worthwhile.

Assume customers acquired at the end of the year are worth the same as those acquired at the beginning of the year. Assume a 10% discount rate.

Analysis

You begin by calculating the cost to acquire customers under the terms of the deal.

Annual advertising spending (ad$), the number of new buyers per year (buyers), and cost to acquire (CTA) per customer is likely to be [ Select ] ["$18 million (ad$); 82,125 buyers; $219 CTA", "$36.3 million (ad$); 11 million buyers; $3.31 CTA", "$18 million (ad$); 12 million buyers; $1.50 CTA", "None of these choices", "$36.3 million (ad$); 82,125 buyers; $441 CTA"] .

Next, you calculate the customer lifetime value of the newly acquired customers.

The expected contribution margin (cm) per customer, margin multiplier (mm), and LTV are [ Select ] ["none of these choices", "$90 CM, .396 MM, $126 LTV", "$60 CM, .396 MM, $84 LTV", "$90 CM, 1.89 MM, $261 LTV", "$60 CM, 1.89 MM, $174 LTV"] .

To sweeten the deal, Facebook is willing to guarantee the maximum ad expense per customer (ie cost to acquire) will not exceed two times the CLV. "That way, you'll get your money back in just two years," the Facebook rep explains.

Do you recommend Zappos commit to this deal? [ Select ] ["No because the rule of thumb for online purchases is CTA should not be more than 1.5 times the order value", "Yes, because two years is a reasonable payback period", "Yes because the CLV is less than CTA", "No because the CLV is less than CTA"]