Question

Nike is reviewing whether it should buy exclusive rights to advertise on the front page of a social network search engine, Zignet. At the launch of the agreement, Nike is expected to make an upfront payment of $15 million to Zignet. In addition, Nike would spend an average of $15,000 per day on Zignet advertising for a full year. In return, Nike’s brand would be featured exclusively and prominently on many of Zignet’s pages for one year. More specifically, Nike expects to be present on 60% of Zignet’s 50 million pageviews per day. Based on industry estimates, Nike believes 0.25% of every pageview at Zignet would result in a visit to its own website for the entire year of this deal. Nike’s own experience suggests that about 1.0% of the visitors to its site actually buy books and other merchandise. While the typical retention rate for Nike customers is over 90%, management is concerned that customers coming from the Zignet site will have a retention rate of only 70%. The dollar amount of a typical order is $100. Nike’s CFO was concerned that, with a 30% contribution margin per order and 10% cost of capital, this deal may not be worthwhile.

What is your recommendation based on calculated Customer Lifetime Value? Assume customers acquired at the end of the year are worth the same as those at the beginning of the year.

Answer 1

Answer : For the Nike advertisement deal on Zignet View site.

Nike is planning to carryout the deal for the advertisement on the zignet's pages, so that Nike will be advertised on the zignet site and it will attract the consumers for Nike. Zignet is a large viewer site with 50 millions of people. But based on the given conditions as below

Zignet's total viewers = 50,000,000

Nike expect to present on 60% = 30,000,000

Nike belives that 0.25% of zignet vierwers will visit Nike site = 75,000

Nike 1% visitorsactually make but decision = 750 buyers

Thus by making the advertisement deal with Zignet, the Nike will be able to develop 750 consumers for the year.

Against the investment of 15 millions of dollars as one time payment plus $15000 per day for the whole year.

Thus total earning Nike can get from the advertisment deal = $20250 / year against the investment of 15 miilion + 15000/day for a year.

Thus the deal looks to be NOT OK, as the return is very low against the investments.

REfer the below table for details.

Zignets Viewers	Nike expect to present on 60%	Nike Belives 0.25% Zignet viewes visits NIKE Site	Nike-1% visitors actually buys	Cost of order	Total Yearly Sale	customer retention rate - 70%	30% margin	10% capital Cost	Net Profit = margin - capital Cost
50,000,000	30,000,000	75,000	750	$       100	$75,000	525	$22,500	$2,250	$ 20,250