Recall that Hula's management believes that each customer generates $3.50 in short-run profit and $25 in lifetime profit. Calculate the advertising cost per conversion for Internet advertising Options 1 (Monthly Online Magazine) and 2 (Affiliated Retail Store). Calculate the total expected profit from each option (short-run and lifetime), as well as the ratio of total profit to advertising cost (short-run and lifetime). To determine the benefits of an advertising campaign, should Hula Island use the profit on the first sale or the expected lifetime profits? To choose between advertising campaigns, should Hula Island use the total expected profits or the ratio of total expected profits to advertising costs?

2. Using your answer from Question 1 (either short-run or lifetime, total expected profits, or the ratio of total expected profits to advertising costs), determine the winner of the comparison between Options 1 and 2. Advertising Option 3 is different from the other two options in that the auction determines the fixed advertising cost. Assume Hula wins the search engine auction with a bid of $105. Which advertising option (1, 2, or 3) would you recommend to management?

Table 2: Costs and Predicted Outcomes for each Advertising Option

CostsOpt. 1 Mon. Online MagazineOpt.2 Affiliated Retail StoreOpt. 3 Search Engine Variable$0.00$0.25/click$0.005/click

Fixed$500$50Auction

Outcomes

Expected Clicks1,5505,78084,000

Average Pg. views2051.5

% of Clicks Converted 7.00%3.00%0.14%