Q1: Using CLV to evaluate spending on customer acquisition and customer retention.

Brushes & Buckets, a paint wholesaler, sells paint to professional painters. On average, each painter spends $38,333 per year on paint. The average gross margin for Brushes & Buckets is 35%, and it currently has $4.2 million of sales in this segment. The current retention rate of each painter is 80%, and the revenue per painter is stable over time. (Assume a 10% discount rate.)

1. The marketing director proposes spending $1,000,000 for a one-time direct marketing campaign to acquire new professional painters. How many painters would Brushes & Buckets need to acquire to make this investment profitable in the long term? (10 points)

Hint: Use CLV to help calculate the breakeven point.

CLV = = m [ r / (1+i-r)]

m = gross margin

r = retention rate

i = discount rate

2. The marketing director also wants to determine the maximum amount of money Brushes & Buckets should spend to increase the retention rate of the current professional painters from 80% to 90%.

Hint: Use CLV to help calculate the difference in Lifetime value when the retention rate is 80% vs. 90%.