1) A firm operating in a market with one another firm retain 60% of its customer

Question

1) A firm operating in a market with one another firm retain 60% of its customers and acquires 95% of its competitor’s customers. What is the long run market share of this firm?

2) Assume interest rate is zero. You have identified two types of customers. Customers of type A give you a per-period profit margin of $50. Your retention rate for type A customers is 0.8. Customers of type B give you a per-period profit margin of $85. Your retention rate for type B customers is 0.4.

a. What is the absolute CLV for type A consumers in the scenario described above? (The absolute CLV ignores acquisition costs.)
b. What is the absolute CLV for type B consumers in the scenario described above? (The absolute CLV ignores acquisition costs.)
c. Imagine you could run a marketing campaign targeting only type B customers to enhance your relationship with them and boost the per-period profit margin to $110? What is the maximum amount of money that you could spend on this marketing campaign and have it earn you the same as not running the campaign (in which case your per-period profit stays $85). Assume there are 10 type B customers.

Explanation / Answer

Market Share 60% Competitor's customers acquire 95% Long run market share 57% a) CLV for type A $50 b) CLV for type B $85 c) Maximum amount $110

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