The owner of a company that sells job-management software to small construction and contracting businesses is thinking about the long-term implications of a possible price increase. The company sells its customers an annual software license, which includes program installation, maintenance, and technical support.
(a) Describe some of the factors that would tend to make the repeat customers of this company more profitable than newly acquired customers.
(b) The owner estimates that, at current price levels, the average remaining lifetime value of the company’s 660 customers over the next five years equals $2880 (in present-period dollars). The average contribution margin on the software license for current customers is 30 percent. The owner is considering increasing his company’s average price for an annual software license from $1200 to $1380. Calculate the breakeven sales level for this prospective price increase both with and without including the CM adjustment for customer lifetime value. Show your work.
(c) Describe the effect of considering customer lifetime value on the breakeven sales levels that you calculated in Part (b). How is this effect likely to affect the decision that the owner will make regarding the possibility of raising the software license’s price?