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Question - Mysportswear (an Internet sports merchandise retailer) is considering a one year deal with Major League Baseball (MLB) to drive traffic to its site. In this one year deal, Mysportswear will make an upfront payment of $10million to MLBin exchange for being named an official retail partner. In addition, Mysportswear will make a secondupfront payment that averages out to $15,000 a day worth of banner advertising on MLB's site. In return, Mysportswear will be featured on 40% of the 40 million per day page views at the MLB site. Based on industry estimates, Mysportswear believes that 1 in 300 views generated by MLB will result in a visit to its own website during the year of the deal. Mysportswear's own experience has been that about 1.5% of visitors to its site actually buy merchandise. While typical retention rates for Mysportswear's customers is 85% from year to year, management was concerned that customers generated through the MLB deal would only have a loyalty rate of 65% from year to year. Typical customers of Mysportswear buy $75 worth of merchandise per year. Purchases at Mysportswear generate gross margins of 37%. Assume cost of capital is 10%.
Required -
a) What is the net lifetime value (taking acquisition costs into account) of a single customer with this deal?
b) What is the overall value of this deal (i.e. scaled up by the total number of customers)?
c) What if the MLB generated customers have the typical 85% loyalty rate instead of 65% as expected above)? Recalculate your answers to a) and b) and briefly discuss.
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