Maru Batting Center: Customer Lifetime Value – Case Solution

Case study questions answered in the first solution:

1. What is the customer acquisition cost to Maru Batting Center for the different types of customers?
2. Without discounting cash flows to take into account the time value of money, how soon will MBC break even on the different types of customers? In all cases, assume that revenues and variable costs to staff the cages occur on an ongoing basis but that the acquisition costs are a one-time event.
3. Taking into account the time value of money and assuming that 100 percent of a customer segment will have experienced attrition once the net present value of annual profits per customer falls below ¥100, what is the lifetime value to MBC of the following customers? Assume that a customer’s lifetime extends up to and including the year in which the net present value of annual profits falls below ¥100.
4. Which is the most attractive customer segment for MBC to target? Explain your reasoning.
5. MBC has been approached by Little League representatives from the nearby Chiyoda ward, who are eager to gain the jersey subsidy the Minato ward has enjoyed due to the company’s sponsorship. Because the parents of Chiyoda Little Leaguers will have to travel a greater distance, Maru believes there will be a lower response rate (8 percent) and a lower retention rate (65 percent), which she can make up for by purchasing slightly lower-quality jerseys, reducing the cost of sponsorship to just ¥600 per player. However, the Chiyoda ward representatives demand that theirs be the only ward receiving such a sponsorship, which means MBC must choose between the two wards. The Chiyoda representatives argue that because their ward has twice the number of Little League customers, it is more attractive than the Minato ward. Should MBC pursue the Chiyoda ward sponsorship? Explain your reasoning.
6. Maru’s brother suggested she focus on the Elite Ballplayers segment, targeting it by offering a ¥500 discount on all future purchases to Elite Ballplayers who purchase at least twenty batting cage hours in Year 1. (Assume all Elite Ballplayer customers book exactly twenty hours each year. Also, assume that this discount is made on top of the gala event option above instead of the magazine option for acquiring Elite Ballplayers.) Although this will decrease the amount MBC can bill Elite Ballplayers (from ¥7,500 per hour to ¥7,000 per hour from Year 2 onward), Maru believes it will increase the retention rate of these customers to 75 percent immediately. Should MBC offer this promotion? Explain your reasoning.
7. Alternatively, Maru has considered ignoring her brother’s advice and targeting the Elite Ballplayers segment by attempting to increase the launch party’s response rate. Instead of offering customers a discount from Year 2 onward, MBC could offer each launch party attendee who commits to purchasing at least twenty batting cage hours a free professional-grade baseball bat with the Yakult Swallows logo. This would cost Maru Batting Center an additional ¥10,000 for each new Elite Ballplayer customer, but Maru Batting Center believes it would increase the launch party’s invitation response rate to 29 percent. Should she offer this promotion? Explain your reasoning.

Case study questions answered in the second solution:

1. Calculate the acquisition cost for each of the 4 customer segments.
2. Consider the time value of money and possible attrition rates, and calculate the lifetime value for each customer segment.
3. Recommend which segment(s) should be the priority for next year.
4. Describe how you will align your marketing programs with this recommendation.