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.

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.