A retail store sells a popular cosmetic called Devine and the store manager is given $300,000 by the corporate office to improve store performance any way she thinks best. The "base case" information is a price of $30 per bottle, a contribution margin of 0.50, a customer defection rate of 20%, and a repurchase frequency of 3 times a year. If these improvement funds could be used to either (a) increase the contribution margin to 0.60 or (b) reduce the customer defection rate to 12% or (c) increase the repurchase frequency to 4 times per year, what is the best way to spend these improvement funds? (Assume all other variables remain at the base case level for each of the three improvement options.) VLC = P*CM*RF*BLC
You may want to use the worksheet below to help organize your computations and answer of the question(s).
$\begin{array}{|c|c|c|c|c|c|}\hline \begin{array}{c}
\text { Improvement } \
\text { Option }
\end{array} & \text { Price } & \begin{array}{c}
\text { Contribution } \
\text { Margin }
\end{array} & \begin{array}{l}
\text { Repurchase } \
\text { Frequency }
\end{array} & \begin{array}{l}
\text { Defection } \
\text { Rate }
\end{array} &\text { VLC in } \$\
\hline \text { Base case } & \$ 30 & 0.50 & 3 & 20 \%& \
\hline(\mathrm{a}) & \$ 30 & & & \
\hline \text { (b) } & \$ 30 & & & \
\hline \text { (c) } & \$ 30 & & & \
\hline
\end{array}$
-Which of the following is the best way to use the $300,000 in improvement funds?
A) Do nothing (stay with base case).
B) Improve option (a).
C) Improve option (b).
D) Improve option (c).

Question

A retail store sells a popular cosmetic called Devine and the store manager is given $300,000 by the corporate office to improve store performance any way she thinks best. The "base case" information is a price of $30 per bottle, a contribution margin of 0.50, a customer defection rate of 20%, and a repurchase frequency of 3 times a year. If these improvement funds could be used to either (a) increase the contribution margin to 0.60 or (b) reduce the customer defection rate to 12% or (c) increase the repurchase frequency to 4 times per year, what is the best way to spend these improvement funds? (Assume all other variables remain at the base case level for each of the three improvement options.) VLC = P*CM*RF*BLC
You may want to use the worksheet below to help organize your computations and answer of the question(s).
 $\begin{array}{|c|c|c|c|c|c|}\hline \begin{array}{c}
\text { Improvement } \
\text { Option }
\end{array} & \text { Price } & \begin{array}{c}
\text { Contribution } \
\text { Margin }
\end{array} & \begin{array}{l}
\text { Repurchase } \
\text { Frequency }
\end{array} & \begin{array}{l}
\text { Defection } \
\text { Rate }
\end{array} &\text { VLC in } \$\
\hline \text { Base case } & \$ 30 & 0.50 & 3 & 20 \%& \
\hline(\mathrm{a}) & \$ 30 & & & \
\hline \text { (b) } & \$ 30 & & & \
\hline \text { (c) } & \$ 30 & & & \
\hline
\end{array}$
-Which of the following is the best way to use the $300,000 in improvement funds?
A) Do nothing (stay with base case).
B) Improve option (a).
C) Improve option (b).
D) Improve option (c).

Quizplus · Accepted Answer

Improving option (b) reduces the customer defection rate to 12%, which increases the customer lifetime value (VLC) significantly. The VLC formula is P*CM*RF*BLC, where BLC is the inverse of the defection rate (1/defection rate). Reducing the defection rate has a larger impact on VLC compared to increasing the contribution margin or repurchase frequency.

A Retail Store Sells a Popular Cosmetic Called Devine and the Store