Verizon is trying to determine the value of a cell phone subscriber in Bloomington, Indiana, and the optimal levels of acquisition and retention spending. Currently Verizon has 20,000 customers and 30,000 potential customers. You are given the following information:
¦ Profits are discounted at 10 percent per year.
¦ Annual profit per customer is $400.
¦ Currently Verizon is spending $12 per prospect on acquisition and capturing 4 percent annually of prospective customers.
¦ Currently Verizon is spending $30 per customer on customer retention and has a retention rate of 75 percent.
¦ Verizon believes that with a saturation level of spending, the annual acquisition rate would increase to 10 percent and the annual retention rate would increase to 85 percent.
a. Determine the value of a customer and the profi t maximizing annual level of acquisition and retention spending.
b. Use SolverTable to determine how the optimal level of retention and acquisition spending in Exercise 1 varies with an increase in annual profit.