Consider the following subscription behavior information from Matweb.com. Subscriptions cost $9.99 per month, but you are charged for the entire year at the time of purchase. There is a one-year minimum term when you sign up for the service. Once purchased, subscriptions are set to renew automatically unless the subscriber cancels them. When a membership renews, it renews for a one-year term and again you are charged for the entire year. There are no variable costs associated with providing this service to an individual customer, but Matweb does engage in customer relationship activities that they believe will increase customer retention. These customer relationship activities cost Matweb about $10 per year per customer. Based on a sample of 1000 customers that joined Genie.com five years ago, near the time when the company was founded, they were able to determine how many of those customers remained subscribers in the second year, third year etc. Based on this information, Matweb calculated the average annual retention rate to be 20%. Matweb uses an annual discount rate of 8%.

a. Last year, Matweb spent $10,000 placing advertisements on Google. Matweb management believes that these advertisements were responsible for about 300 new subscribers. Would you recommend to Matweb management that they purchase more Google ads? (2 points)

b. Suppose a newly-introduced loyalty program increases the number of customers that remained to 30%. Does this new data change your answer to 9.a?

c. Do you have any hesitations or concerns about making recommendations to management based on your above estimate of customer lifetime value?