Gillette, when they release a new shaving system, considers both the sale of the razor and the longer revenue stream from the sale of blades. As a result, the concept of Customer Lifetime Value is critical to their marketing planning efforts. Let's say they are considering introducing a new shaving system. Let's say the average price of their proposed Gillette He Man Power razor is $20.00. The average customer needs 6 packs of razor blades (8 blade cartridges per pack) per year at $30.00 per pack. From past experience, the average customer loyalty period for a shaving system is 7 years. The estimated marketing cost per razor sold in the first year is $90.00 in sales and promotional costs. The profit margin on the blades is 40%. At $20.00 Gillette will be selling the razor at a 50% below cost. (for you accountants don't look for the flaws in this example. It is only intended to consider a basic marketing concept and not necessarily be 100% accurate from an accounting standpoint)
In this example, (a) What is the estimated profit or loss per customer to Gillette in year 1? (b) Using the concept of lifetime customer value, does it or does it not make sense to introduce this new shaving system? (c) Demonstrate why or why not by calculating the actual estimated customer lifetime value?