Question #2: Q2. Two.com, a very successful 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 "Big Diapers"

and the remaining are for "Small Diapers". The margin per purchase is $2.00 for Big Diapers and

$0.20 for Small Diapers. Each year Two.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 negligible marketing communication costs. (3)