A retail store sells a popular cosmetic called Rochelle and the store manager is given $100,000 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 17%, and a repurchase frequency of 3 times a year. If these improvement funds could be used to either (a) increase the contribution margin to 0.58 or (b) reduce the customer defection rate to 15% or (c) increase the repurchase frequency to 4 times per year, what is the best way to spend these improvement funds by answering the next two questions? (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 table below to help organize your computations and answer.
$\begin{array}{|c|c|c|c|c|}\hline \begin{array}{c}
\text { Price \& } \
\text { Improvement } \
\text { Option }
\end{array} & \begin{array}{c}
\text { Contribution } \
\text { Margin }
\end{array} & \begin{array}{c}
\text { Repurchase } \
\text { Frequency }
\end{array} & \text { Defection Rate }&\text { VLV in } \$ \
\hline \$ 30 \text { (base case) } & 0.50 & 3 & 17 \%& \
\hline \$ 30 \text { (option a) } & & & \
\hline \$ 30 \text { (option b) } & & & \
\hline \$ 30 \text { (option c) } & & &\\hline
\end{array}$
-Which of the following is the best way to use the $100,000 in improvement funds?
A) Do nothing (stay with base case).
B) Improve option (a)-increase the contribution margin to 0.58.
C) Improve option (b)-reduce the defection rate to 15%.
D) Improve option (c)-increase the repurchase frequency to 4.
E) Two improvement options have equal VLC dollars, so split the funds between the two tied improvement options.

Question

A retail store sells a popular cosmetic called Rochelle and the store manager is given $100,000 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 17%, and a repurchase frequency of 3 times a year. If these improvement funds could be used to either (a) increase the contribution margin to 0.58 or (b) reduce the customer defection rate to 15% or (c) increase the repurchase frequency to 4 times per year, what is the best way to spend these improvement funds by answering the next two questions? (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 table below to help organize your computations and answer.
 $\begin{array}{|c|c|c|c|c|}\hline \begin{array}{c}
\text { Price \& } \
\text { Improvement } \
\text { Option }
\end{array} & \begin{array}{c}
\text { Contribution } \
\text { Margin }
\end{array} & \begin{array}{c}
\text { Repurchase } \
\text { Frequency }
\end{array} & \text { Defection Rate }&\text { VLV in } \$ \
\hline \$ 30 \text { (base case) } & 0.50 & 3 & 17 \%& \
\hline \$ 30 \text { (option a) } & & & \
\hline \$ 30 \text { (option b) } & & & \
\hline \$ 30 \text { (option c) } & & &\\hline
\end{array}$
-Which of the following is the best way to use the $100,000 in improvement funds?
A) Do nothing (stay with base case).
B) Improve option (a)-increase the contribution margin to 0.58.
C) Improve option (b)-reduce the defection rate to 15%.
D) Improve option (c)-increase the repurchase frequency to 4.
E) Two improvement options have equal VLC dollars, so split the funds between the two tied improvement options.

Quizplus · Accepted Answer

To determine the best use of the $100,000 improvement funds, we calculate the Value of a Loyal Customer (VLC) for each option using the formula VLC = P*CM*RF*BLC, where P is the price, CM is the contribution margin, RF is the repurchase frequency, and BLC is the base loyal customer count (which can be inferred from the defection rate). The base case VLC is not directly calculable without the BLC, but we can compare the relative improvements of each option.For option (a), increasing the contribution margin to 0.58 would increase VLC because both P and RF remain constant, and a higher CM directly increases VLC.For option (b), reducing the defection rate to 15% would increase the BLC, indirectly increasing VLC, but this effect depends on the initial BLC and the scale of improvement might not be as direct or impactful as affecting CM or RF.For option (c), increasing the repurchase frequency to 4 times per year directly increases VLC, as it increases the number of times a loyal customer purchases the product within a year.Without exact BLC values, we prioritize direct impacts on VLC through CM and RF. Between increasing CM and RF, increasing RF (option c) typically has a more substantial impact because it multiplies the entire value of a customer's contribution over more transactions. Therefore, option (c) is the best way to use the funds for improving store performance.

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