Conroy’s Acura – Customer Lifetime Value and Return on Marketing

In the fall of 2006, the president of Conroy’s Acura was examining reports of the company’s quarterly sales. He was concerned that, despite a healthy economy, sales at his dealership were stagnant. The vice-president of sales of Conroy’s Acura was constantly coming up with new marketing schemes to boost sales. But, the president had difficulty determining how successful past marketing efforts had been in increasing profitability. He needed a way to put the numbers into context.
The basic objectives of this case are to introduce the concepts of customer lifetime value (CLV) and return on marketing (ROM) and to demonstrate their use in marketing decisions.
Questions
1. Suppose Conroy’s Acura embarks on an advertising campaign to increase the sales of the CSX, a car with a $2360 markup. De Lima calculates that if the firm spends $20,000, sales of the car to new customers will increase by 10. What is the ROM of the move in net present value (NPV) terms?
2. If Conroy’s Acura reduces the average markup of the RSX to seven percent, how many more cares would need to be sold to make the move profitable?
3. The firm is considering introducing three different programs to increase customer retention:
1. One free oil change per year (increases the annual cost of maintaining the customer relationship from $10 to $30)
2. Four free oil changes per year (increases annual cost from $10 to $90)
3. Four free premium oil changes per year (increases the annual cost from $10 to $130)
4. Using the data in Question 3—for programs a, b, and c, assume one new sale per car class, two new sales per car class, and three new sales per car class, respectively. What retention rate would the company need to achieve to make the programs profitable?
5. What strategy (or set of strategies) should Conroy implement to improve his company’s long-run profitability?

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