Reference no: EM132238844

CUSTOMER LIFETIME VALUATION: SOTARG INKJET PRINTERS – A BRIEF EXERCISE

Julien LEVY is product manager at SOTARG France in charge of printers and related accessories. After reviewing his sales figures for the past third quarter, Julien is worried that he might not hit this year’s annual sales targets. As a consequence, he considers an end-of-year promotion in cooperation with selected retailers in Paris and the Greater Paris region.

Julien has been approached by Florent GASPARD, owner and managing director of Promo Plus, a direct marketing firm in Suresnes, outside Paris. Florent has offered his services in developing and implementing a sales promotion campaign to help boost SOTARG’s end-of-year sales. He suggests an in-store promotional campaign in 10 hypermarkets: Carrefour (4 stores), Auchan (3 stores), Leclerc (2 stores) and Hyper U (1 store). Florent suggests placing one booth at the entrance of each hypermarket during the four crucial Saturdays before Christmas. Promo Plus’s price quote is €250/day/booth including promotional material and remuneration of a sales promotion specialist.

Julien has to make a decision. Is Florent’s proposal interesting? The details are as follows:

In SOTARG’s business, customer retention rates are as follows: on average, four customers out of five continue to use their inkjet printer after a full year. In fact, many customers trade up after a while to more sophisticated laserjet printers. After the second year, only half of the remaining customers continue. In other words, two customers out of four defect after year two. After year three, the remaining customers also stop using their printer. Thus, the maximum lifetime of a customer is three years.

Consumers typically print 200 pages with a SOTARG 100 ink cartridge. In a consumer household, cartridges thus generally last for 3 months before they need replacing. SOTARG does not capture all replacement cartridge purchases. In reality, 15% of all customers buy SOTARG-compatible low-cost and/or recycled cartridges from specialists or over the internet from vendors such as www.123consommables.com. Thus, at a rather conservative estimate, an average household typically buys every seventh replacement cartridge from other sources.

To boost sales, Julien plans to sell a promotional bundle during the holiday season at a retail price of €50.43. The bundle consists of one SOTARG Inkjet Printer (€33.45/unit), one Mediabridge Hi-Speed cable (€3.99/unit) and one SOTARG 100 Black Ink cartridge (€12.99). SOTARG achieves higher margins on cartridges (85% profit margin) and cables (80% profit margin) than on printers, which are sold at a loss (-40% profit margin).

SOTARG forecasts annual price increases for its products of 2% per year. SOTARG price increases come into effect on January 1 each year. The company uses a corporate-wide discount rate of 10%. To know whether he should move forward regarding Florent’s proposal, Julien asks himself the following questions:

a) What is the lifetime value of a single customer who stays with SOTARG after his/her purchase of a SOTARG inkjet printer in the current Christmas sales?

b) Florent’s proposal seems quite expensive. Julien would like to put some pressure on Florent to commit to a result to be achieved by the end of the promotional campaign just before Christmas. Is this an interesting proposition? How many promotional SOTARG printer packages should Florent’s in-store promotions crew sell in the 10 hypermarkets in order to make this promotional campaign interesting for SOTARG?

c) What could be done to improve the profitability of this direct marketing initiative for SOTARG? In other words, what could SOTARG do to enhance the economic return of acquiring these new customers? Suggest two concrete actions and briefly explain, in 3–4 sentences, how they would impact results.