Question
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%
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.
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