Calculate the breakeven quantity for each model

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Reference no: EM132286998

A subscription hair service, WigzMax, is planning to launch a new line of wigs. They intend to hire a celebrity hair stylist to make the new line of four new models: Halle, Nia, Janet, and Toni. WigzMax will spend $10,000 to hire the designer, and $125,000 on marketing. The prices and variable costs of the models are: PHalle = $260, VCHalle = $75; PNia = $230, VCNia = $65; PJanet = $360, VCJanet = $75; and PToni = $175, VCToni = $40. They expect to sell the models in the ratio 4:7:5:3, respectively. The total customer base of WigzMax is 4,430 customers.

a. Calculate the breakeven quantity for each model.

b. Assume that customers who buy certain models don’t switch to different wigs, but the probability of staying with WigzMax from year to year has been 75%, 80%, 68%, and 85%. Assuming a discount rate of 7% annually, calculate the CLV for customers in each wig segment. Use the total contribution for each wig from part (a) as the (annual) margin in each case, and remember to subtract the AC.

c. If WigzMax has $275,000 to spend on increasing the retention rate in the segment with the highest CLV, what would the retention rate need to increase to, in order to justify spending that amount on retention. (Hint: Number of customers would be the sales mix fraction times the total customer base. Change M by subtracting $275,000/number of customers in that segment. Rearrange the CLV formula in terms of r gives the following).

d. Suppose that instead of spending on retention, WigzMax would like to increase the number of customers from its highest CLV segment. It is considering an ad buy for the $275,000, which will be viewed by 2,000 potential customers in that segment. What percent of the targeted customers would need to join in order for the acquisition spending to be worthwhile? Add a sentence to explain what your answer means.

e. Again, just looking at the highest CLV segment, suppose that instead of spending the whole $275,000 on the ad buy, WigzMax decided to spend $175,000 on that, and set aside up to $100,000 towards coupons. Of course, not everyone will redeem the coupon, but they expect to recruit at least 500 of those customers with an offer of a $40 coupon, or at least 400 if they offer a $30 coupon. Assuming that spending the $275,000 on advertising would have brought in 300 customers:

i. Calculate the new CLV for each option:

1. $275,000 on ads

2. $175,000 on ads and a $40 coupon

3. $175,000 on ads and a $30 coupon

(Hint: AC from ads and coupons should be separated. Although $100,000 was budgeted, you are paying only for the number redeemed. In other words, AC for the ones with coupons will be (Ad spending/number who switched) + coupon. AC is the only change in each case).

ii. Calculate the total segment value for those new customers for each option from part (i). (Hint: CLV number of new customers).

Reference no: EM132286998

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