Sonik CD was a wholesale buying club for classical, jazz, and blues enthusiasts. Annual membership was $40. Sonik scoured distributors and independent retailers to find hard-to-get and outof- print releases. At $10.95 per CD, Sonik's prices were lower than average retail prices; average cost to Sonik was $10.50 per CD. Subscribers paid $4.00 per package shipping and handling; average cost to Sonik was $0.50 per package. On average, subscribers purchased 19.9 CDs annually, mostly through Sonik's website. Annual subscriber retention rate was 90 percent. Sonik accumulated CDs from various suppliers and fulfilled its own orders. Annual fixed costs of fulfillment were $400,000; shipments averaged 3.7 CDs per package. Annual marketing expenses were $230,000; Sonik spent 90 percent on acquiring new subscribers and 5 percent on subscriber retention. Sonik's cost of capital was 12 percent. It was considering three growth options: a. Continue the Niche Strategy: Sonik believed it could acquire 20,000-30,000 new customers per annum for the next several years without major new investment. Sonik also believed that spending $0.5 million per annum would increase customer retention to 95 percent. b. Mass-Market Strategy: Abandon the subscription model, add many other music genres, and build a mass-market brand. Sonik estimated it would need an initial investment of $1-2 million to build brand awareness, plus an additional $0.5 million per annum for distribution and warehousing. Sonik believed it could add 40,000-50,000 new subscribers per quarter at a subscriber acquisition cost of $12.50; annual margin, $15; and 60 percent customer retention rate. c. Distribution Strategy: In addition to CDs, Sonik distributed products for other online retailers. AmeriNet Radio operated 43 radio stations in the southeast U.S. and sold CDs though its stations' websites. It approached Sonik for an exclusive arrangement. Sonik would close its retail operations and become the sole distributor for all CDs sold through AmeriNet's websites, charging its normal handling fee. Sonik's price per CD would be $13.25 - it would pay AmeriNet $1.50 per CD sold. AmeriNet had 25 million listeners. Research suggested that 5 percent of its listeners bought CDs online and that 10 percent of these would buy from Sonik. A typical customer would buy twice a year, averaging two CDs per order. Sonik would incur additional fixed costs of $0.5 million per annum.

Based on these data, which option should Sonik take? What are the risks of each option? Show calculations in your answer.