This is an analytical question that will require formulas covered in our sessions. Please justify your answer with clear calculations and state any assumptions. Calculations are not included in the word count.
GardenPlus sells gardening material. Its customers purchase these products directly via the company website and the call center. The average purchase per customer is about €64. The average unit contribution margin is 40% and the company’s opportunity cost of capital is 10%.
The in-house research department has come up with a useful segmentation for the market. They think the market can be described in terms of two types of customers depending on their behavior towards gardening. They have labeled these segments “Green Fingers” and “Strugglers.”
Green Fingers are gardening lovers who make up 45% of the market. They purchase on average €74 of goods a year. Their retention rate year on year is highly desirable for the business. Strugglers, who represent the remainder of the market, are a bit different. They have an idealized vision of gardening and are willing to try it out, but they do not have the discipline or talent necessary to keep gardening as a hobby and often give up. Their retention rate is thus a little lower and they spend lesser every year. The details of these two segments are summarized in the table below in Exhibit 1.
45% of total market
74 per year
55% of total market
38 per year
Right now, GardenPlus has 121,366 customers that can be considered active. Its current customer base is composed of 72% Green Fingers and 28% Strugglers.
A psychologist you hired as a consultant has suggested that a booklet with gardening tips and personal stories of gardening hobbyists can inspire customers to keep up gardening for longer. A pilot test revealed that the retention rate of customers classified as Strugglers could be increased to 65% with this reading and promotional material. Production and mailing costs of each booklet are €2.50. You are given a marketing budget of €85,000.
Do you recommend GardenPlus to invest the €85,000 into the booklet?