M Steak, an online specialty retailer that serves the southern California region market with its gourmet black-haired wagyu steak from its website. The steak is priced at more than $300 per pound. As a result, M Steak caters to only gourmet food enthusiasts (foodies) who purchase regularly for their own consumption, and other customers (non-foodies) who purchase less frequently as holiday gifts. M steak is contemplating the purchase of a customer list from a list broker for $10 per name. The company will send each person on the list a full-color catalog for the first year, which costs the company $10 to produce and $1 to mail every month. After the first year, those who do not purchase the product will be removed permanently from the mailing list while the remaining customers will continue receiving catalogs on a monthly basis. Generally speaking, such a customer list results in a response rate of approximately 15% for foodies; that is, 15% of the customers who receive an unsolicited catalog in this manner will make a purchase. On the other hand, the response rate for non-foodies is at 25%.
Their foodie customers will make on average four purchases per year with an average order size of $200. Foodies usually have an annual retention rate (the percentage of customers who will continue to make purchase the next year) of 85%. The non-foodies will only make two gift purchase per year with an average order size of $250. The retention rate for non-foodies is only 65%.
M Steak ships its product in a sealed containers filled with dry ice to preserve the meat freshness.
It is able to make 50% margin from its foodie customers and 60% from its non-foodie customers.
M Steak assumes a 8% discount rate for its time value of the money.
Please answer the following four questions using an Excel spreadsheet (i. Clearly write down your answer to each of the following four questions in your spreadsheet; ii. Show your steps if needed to receive partial credit.):
3. M Steak considers that the customer lifetime has ended when the NPV of expected annual net profit dips below $50. If so, how much is the customer lifetime value for each type of customer?