Question

PLEASE EXPLAIN WITH FORMULAS, TRYING TO LEARN THE CONCEPTS. THANK YOU.

The Massage Place charges $66 for a 60-minute massage. The cost of providing a 60-minute massage is $22. The marketing director has determined that the average client gets a massage once every three months, and she is analyzing the profitability of a membership plan where members receive a discount on massages. The annual membership fee would be $50 and would entitle the member to 1 60-minute massage each month for $47. What additional is the additional value generated by the membership plan per client if an average client books a massage every month under the plan? Assume a three-year time horizon. IBC Currency (US)

Answer 1

1. In the present scenario, it can be observed that average clients gets massage once in every 3 months. That is he visits 12/3 = 4 times in an year. So, for 3 years we receive the following contribution:

Gross revenue (3 years*4 times*66/massage)	792
Less: Costs (3*4*22/massage)	264
Contribution	528

2. In the proposed scenario, we have an annual membership fee of $ 50 and massage charges are reduced to $ 47 per massage. Our costs per massage remains the same at $ 22/massage. Lastly our client turns up every month so 12 visits per annum. So, for 3 years we receive the following contribution:

Gross revenue (3 years*12 times*47/massage)	1692
Membership Fees (3 years * 50)	150
Less: Costs (3*12*22/massage)	792
Contribution	1050

Hence Value added => 1050 - 528 = 522.

Pls comment in case of any query regarding the solution.