Question 4 Not yet answered Points out of 1 In another proposal, the CFO of the

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Question 4 Not yet answered Points out of 1 In another proposal, the CFO of the magazine suggest that the magazine should increase the subscription fee by 20%. Based on her calculation, this will increase the contribution margin (profit) from each customer to $35. The downside is that we expect more customers to stop their subscription each year. She estimates that the retention rate will go down to %20 if the company implements the new strategy. So, they ask you to help in making the decision. Use the same discount rate as before. Flag question What the value of each customer will be if they implement this strategy? Answer: Question 5 Not yet answered Is this new pricing strategy worth pursuing? In other words, does this strategy generate more value for the company? Points out of 1 Select one: O a. Yes b. No Flag question

Explanation / Answer

Lets assume the earlier price be $100 on which 20% increase will lead to new price of $ 120. However, costing will be same and the contributin will be $ 35 which will be 35/120 = 29.17% . while earlier the contribution would be 15%

Now lets assume that there were 100 customers earlier which subscribed and now it is falled by 20% to 800. Accordingly, contribution would be 80 x 35 = $ 2800 while earlier it would have been 100 x 15 = $ 1500.

Value of each customer will be $ 120 - $ 100 = $ 20 x 80% = $ 16

We multiplied it by 80% because 80% retained it while 20% cancelled it.

It would be benifiical as overall contribution earned increased.

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