Question: Consider the allocation decision between acquisition and retention. A firm has a budget of $ 50 to be spent on a given customer. Lets assume

Consider the allocation decision between acquisition and retention. A firm has a budget of $ 50 to be spent on a given customer. Lets assume that the consumer generates a margin of $200 for the firm annually. Using the idea of customer equity, which of the following allocation generates greater profitability for the firm? Why?

1. $20 on Acquisition and $30 on retention

2. $30 on Acquisition and $20 on retention

Assume that we are considering an infinite time horizon and that first year cash flows (from the prospect) are not to be discounted but the future cash flows from the customer are discounted with a discount rate of 10% (i.e. d = 0.1).

Acquisition rate (a) at $20 Acquisition spending/prospect	0.2
Acquisition rate (a) at $30 Acquisition spending/prospect	0.3
Retention rate (r) at $20 Retention spending/customer	0.5
Retention rate (r) at $30 Retention spending/customer	0.6

Please show your work.

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