A subscription hair service, WigzMax, is planning to launch a new line of wigs. They intend to
Question:
A subscription hair service, WigzMax, is planning to launch a new line of wigs. They intend to hire a celebrity hair stylist to make the new line of four new models: Halle, Nia, Janet, and Toni. WigzMax will spend $18,000 to hire the designer, and $225,000 on marketing. The prices and variable costs of the models are: PHalle = $250, VCHalle = $75; PNia = $235, VCNia = $65; PJanet = $340, VCJanet = $75; and PToni = $175, VCToni = $40. They expect to sell the models in the ratio 4:7:5:3, respectively. The total customer base of WigzMax is 6,250 customers.
a. Calculate the breakeven quantity for each model.
b. Assume that customers who buy certain models don’t switch to different wigs, but the probability of staying with WigzMax from year to year has been 75%, 82%, 68%, and 85%. Assuming a discount rate of 5% annually, calculate the CLV for customers in each wig segment. Use the total contribution for each wig from part (a) as the (annual) margin in each case, and remember to subtract the AC.
c. If WigzMax has $325,000 to spend on increasing the retention rate in the segment with the highest CLV, what would the retention rate need to increase to, in order to justify spending that amount on retention. (Hint: Number of customers would be the sales mix fraction times the total customer base. Change M by subtracting $325,000/number of customers in that segment. Rearrange the CLV formula in terms of r gives the following).
d. Suppose that instead of spending on retention, WigzMax would like to increase the number of customers from its highest CLV segment. It is considering an ad buy for the $275,000, which will be viewed by 2,000 potential customers in that segment. What percent of the targeted customers would need to join in order for the acquisition spending to be worthwhile? Add a sentence to explain what your answer means.
Expert Answer:
a Calculate the breakeven quantity for each model The breakeven quantity for each model can be calculated using the following formula Breakeven Quantity Fixed CostsPrice Variable Cost For Halle BQHall... View the full answer
