Nike is reviewing whether it should buy exclusive rights to advertise on the front page of a social network search engine, Zignet. At the launch of the agreement, Nike is expected to make an upfront payment of $15 million to Zignet. In addition, Nike would spend an average of $15,000 per day on Zignet advertising for a full year. In return, Nike’s brand would be featured exclusively and prominently on many of Zignet’s pages for one year. More specifically, Nike expects to be present on 60% of Zignet’s 50 million pageviews per day. Based on industry estimates, Nike believes 0.25% of every pageview at Zignet would result in a visit to its own website for the entire year of this deal. Nike’s own experience suggests that about 1.0% of the visitors to its site actually buy books and other merchandise. While the typical retention rate for Nike customers is over 90%, management is concerned that customers coming from the Zignet site will have a retention rate of only 70%. The dollar amount of a typical order is $100. Nike’s CFO was concerned that, with a 30% contribution margin per order and 10% cost of capital, this deal may not be worthwhile.
What is your recommendation based on calculated Customer Lifetime Value? Assume customers acquired at the end of the year are worth the same as those at the beginning of the year.