A company\'s marketing manager is considering a mobile app development proposal.

Question

A company's marketing manager is considering a mobile app development proposal.

One proposal offers to create a brand community of users for the company. The manager estimates that the brand community will engage current customers and increase each customer’s lifetime value (CLV) from $100 to $120. In addition, word-of-mouth about the community could increase the value of the online social community. The brand community development entails a one-time cost of $1.2 million to create and maintain (in perpetuity).

a) How many people must use the brand community for it to break even, if we ignore the word-of-mouth effect?

b) How will the answer to part (c) change if we now consider the word-of mouth effect? To include the word-of-mouth effect, assume that each original user of the brand community invites five friends on average, of whom 2% convert to become regular users (these later users do not invite any more friends). Assume those friends who convert were not previously customers, and have a lifetime value of $120.

Explanation / Answer

The breakeven point is the sales volume at which a business earns exactly no money. CLV is nothing but net profit earned per customer.

Break even =total fixed cost/profit per unit

=1.2 million/120

=10000

So 10000 people must use the brand community for it to break even, if we ignore the word-of-mouth effect.

Now, due to word of mouth out of 5 friends 2%i.e 0.1 converts to become regular user.

So 10000 people will invite 50000 friends out of which 1000(50000*2%) become regular users.

So now total 11000 users will use brand community.

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