One particular area of interest for the firm is whether changing the specific content offered in the subscription would have a material impact on a prospective customer's willingness-to-pay. To form a basis for your quantitative analysis, you recently conducted a large-scale conjoint survey to a sample of 1,000 subjects, selected to mimic your current target market of prospective customers. Currently, your firm offers a single subscription plan consisting of content from the following television channels: NBC, CBS and ESPN. However, for the purposes of the study, several other channels were also tested. Each subject was asked to rate 15 different subscription profiles. In each profile, the subject was asked to evaluate the content packages on a 1-month basis (i.e. ratings are on a per-month of service basis). In addition, the study included the specific phone (device) model since different models have different displays, making the "viewing experience" device-specific. Three specific phone models were tested: Nokia, Samsung and LG. Subjects were given live demonstrations of the service on each of the devices before completing the survey. In other words, the valuation of the "brand of the device" pertains to the valuation of monthly phone service on this specific device. Therefore, the valuations of different television content pertain to the additional benefit a subject receives from watching a specific television channel (irrespective of the device on which it is watched i.e. there is no complementarity between the specific device and the value a subject derives from watching television content). Currently, the firm only sells its subscription service for usage on the LG phone. Results from this survey have already been WTP tabulated by your marketing research team. Features Segment 1 Segment 2 Segment 3 The market research team has already Base Device (LG) 18.27 41.23 67.52 NBC 1.82 8.28 14.13 clustered the subjects from the study into ABC 4.41 7.93 8.15 distinct groups (or "segments"). To calculate HBO 43.51 44.16 13.37 the willingness to pay, the LG device was CNN 3.12 0.69 11.28 treated as the base brand and the brand CBS 2.79 14.41 21.83 valuations of Nokia and Samsung were ESPN 2.24 11.72 17.97 measured relative to the LG device. STARZ 11.45 2.70 -7.90 Nokia -6.87 -4.48 -16.92 Phase III Tasks: Samsung 3.69 14.22 19.99 Segment Size 59.40% 14.20% 26.40% Demand Analysis: 1) a. Consider the current subscription plan offered by the firm and assume it is the only service offered on the market: basic service on the LG Device with content from NBC, CBS, and ESPN. Plot the EVC demand curve for this subscription plan. Be sure to label your graph clearly. b. Now suppose the firm also offers an alternative plan consisting of basic phone service on the LG device with content from NBC, CBS, ABC, ESPN and STARZ for $50 per month. Plot the new EVC demand curve for the plan offered in 1 (a).Pricing Analysis: 2) Suppose the firm only offers the plan in 1(a). What is the revenue-maximizing, monopoly price of the subscription for a month of service? 3) Suppose the firm would be willing to unbundle the basic phone service and content instead of offering the plan in (2). Under this new plan, the firm sells the LG device with basic phone service as one option. However, customers optionally could choose to add the content bundle to the basic service. The content bundle consists of NBC, CBS, and ESPN. An additional price would be charged for the content bundle. Naturally, a customer would have to purchase the basic phone service in order to get access to the additional optional television content. a. What are the revenue maximizing, monopoly price for the basic phone service on the LG device and the revenue maximizing, monopoly price for the optional content bundle? Show your work. b. How do the revenues and prices from this scheme compare with the scheme in Q2? Does your answer make intuitive sense? Why or why not? Accounting for the Lifetime Value of the Customer: 4) As before, suppose the firm only offers the subscription plan consisting of NBC, CBS and ESPN. Suppose also that it prices this plan at the rate you computed in question 2. Using other field data on the existing base of subscribing customers who have already adopted the service, you know that an existing customer has a 72% chance of cancelling her service in any given month when you charge the price computed in question 2. Assume that those who cancel their service will never re- activate (i.e., cancellation of service is a terminal state). Your marketing team has determined that the size of your total potential customer market is 500,000 individuals and your current existing customer base is 150,000 individuals. That is, 500,000 is the total market size out of which 150,000 are already existing customers. From accounting, you also know that the cost of providing service to a customer (existing or prospective) is $8 per month (this cost includes billing costs which are handled by mail). Moreover, the cost of contacting a prospective customer with an offer to sign up for the service is roughly $5. This "initial marketing contact" cost does not apply to existing customers. Finally, the firm's monthly borrowing cost of capital used to discount future cash flows from a customer is 5%. For a visualization, refer to Figure 1 below. a. What fraction of the prospective customer market would you predict will adopt the service at this price? This fraction constitutes the probability that a randomly selected prospective customer would adopt at the given price level. This question is asking you to determine x% in Figure 1. [Hint: Assume the earlier conjoint study was "representative" of the consumer market and use the EVC demand to figure out which segments would buy and which would not.]b. Build an LTV model and calculate the net present value of a prospective and an existing customer respectively. A prospective customer is contacted once per month until they get converted. Assume that once customers sign up, they all have the same probability of renewing their service (i.e., converted subscribers have homogeneous tastes for the service). Show your work. [Hint: use the following LTV model: New Customer: NC = -cost + Prob(no response |NC)(SNC) + Prob(subscribe NC)(m + SC) Existing Customer: C = Prob(terminate|C)(0) + Prob(renew|C)(m + 8C) where "cost" is the contact cost, "m" is the margin earned from a paying subscriber, and "S" is the discount factor. "NC" and "C" are the present value of a "prospective new customer" and a "current subscriber" respectively. You should be able to solve this with a pen and paper.] c. Recently, HBO has contacted your firm to negotiate a contract that would add HBO as part of the monthly subscription plan. The proposed contract would bill your firm an upfront fixed payment of $50 million irrespective of the number of subscribers and a monthly payment of $2 per subscriber. Suppose you would continue to charge the price calculated in question 2 even after adding HBO to the subscription. In a small-scale pilot test, you already determined that adding HBO reduces the cancellation rate for an existing subscriber, lowering it from 72% to 65%. Would adding HBO to the subscription package be profitable in the long term? Show your work. (Hint: adding HBO might change the acquisition rate, x% in Figure 1.)Figure 1: Customer Acquisition and Retention No Response (100-x)% Promo sent to prospective Terminate customer (promo cost = $5) Subscribe x% Cancel Subscriber 72% (marginal cost = $8) Renew 28%