Subject: Pricing Strategy

A monthly magazine is sold on the newsstand for $7.50 per issue and has printing and distribution costs of $1.50 per issue. In the first year of sales, the publisher spends $20.00 to acquire each new reader and $2.00 to retain them. The customer retention rate from one month to the next is 0.95, and the publisher applies a discount factor of 0.5 percent per month. In the second year of sales, the publisher decides to spend 50 percent less on acquiring new customers but more on retaining them to increase the customer retention rate to 0.99. What is the maximum amount the publisher should spend on retaining a customer if it aims to be just as profitable in the second year as in the first? Assume the price and non-marketing variable costs remain constant throughout the two-year experiment. Show all your calculations.