Question

A consumer appliances company HomeClean Inc. is planning to launch a new handheld vacuum cleaner in the US market. The estimated market size for handheld vacuum cleaners is 10 million units. The company aims to gain a 5% market share in the first year. The company is trying to decide between two major initiatives to acquire new consumers.

Plan A – TV advertising. HomeClean Inc. knows from past experience that only 15% of those who saw the ads processed the information and became aware of the product. Usually only a fourth of the aware consumers seriously considered buying the product. Only 10% of those who considered the product is likely to finally end up buying the product. Cost of producing the TV ad is $200,000. In addition, the cost per viewer is 10 cents.

Plan B – Facebook advertising. Past analysis of Facebook ad campaigns shows that only 1% of consumers who came across the ad on their page (impression) were likely to click the ad and view it. And only 1% of those who clicked the ad were likely to purchase the product. The company has to pay Facebook $10 for thousand impressions. Cost of creating the Facebook ad is $10,000. Assume that the company is able to meet the goal of gaining 5% market share using either of the routes. Also assume that the viewers are members from unique households. What is the acquisition cost per customer in each plan?

2 a) A regional bank based out of Los Angeles offers two main services - basic (checking, savings accounts) and lending (mortgages, loans). Customers in each category generate revenues of $100 and $200 per year respectively. Attrition rates are 15% across both the services. Retention costs per customer are $85 and $125 respectively per year. Calculate the CLV per customer for each of the two categories. Assume a 10% discount rate.

b) The customer relationship management team of the bank decides to focus on customers who use the basic services because if they stay longer with the bank, there is a high probability of cross selling the lending services to them to increase revenues. The team estimates that the bank could reduce attrition rate of basic services customers from 15% to 10% by incurring an additional retention cost of $5 per customer per year. Should the bank proceed with this plan? (Hint: Use CLV to answer this question!)

Answer 1

Question 1
Market size	10000000
Target market share	5%
Target number of customers	500000
Plan A
Viewers who process ad information	15%
Out of them those who Consider buying	25%
Out of that, those actually buying	10%
So to get 500000 customers, the ad must be shown to 500000/(15%*25%*10%)
Required number of viewers	13,33,33,333
Ad Production cost	200000
Viewer cost	13333333.33
Total Marketing cost	13533333.33
Acquisition cost per customer	$                      27.07	=Total marketing cost/Target number of customers
Plan B
Impressions required	5000000000	=500,000/(1%*1%)
Cost per impression	0.01
Total cost of impressions	50000000	=Impressions required*cost per impression
Productio cost	10000
Total Marketing cost	50010000
Acquisition cost per customer	$                    100.02	=Total marketing cost/Target number of customers

Question 2

Part a

The formula to calculate CLV is

Retention Rate Customer Lifetime Value = Margin. 1+ Discount Rate - Retention Rate

The required values for each case are listed below side by side:

	Discount rate		10%
	Basic Services				Lending services
Revenues	$        100				$        200
Retention cost	$          85				$        125
Margin	$          15				$          75
Attrition %	15%				15%
Retention rate	85%				85%
Putting these values in the given formula for both cases we get:
CLV	$          51				$        255

Part b
The new value of parameters will be
	Basic Services
Revenues	$        100
Retention cost	$          90
Margin	$          10
Attrition %	10%
Retention rate	90%
CLV	$          45

As the CLV is getting reduced by following this plan, so the bank should not proceed with the plan.