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Exercise 2: Blockbuster!

It’s 1994, and you are one of the brand managers for Blockbuster Video (remember those?). You are interested in whether a 3-year marketing campaign centered on extended weekend rentals for “Preferred” clients would be profitable. Based on field tests in select markets, giving Preferred membership customers a weekly coupon for the latest blockbusters seems to increase the number rentals over the weekends if the key titles are adequately stocked.

• The average Preferred customer rents 2 old titles at $1.99 and 1 blockbuster title for $4.99 each week. The data suggest that customers will rent TWO additional blockbuster movies over the weekend when given a $2.00 discount per weekend blockbuster title. Thus, each customer rents on average 2 old titles (at $1.99), 1 blockbuster title during the week (at $4.99), and at least 2 discounted blockbuster titles (at $2.99) over the weekend.
• Each store on average hosts an average of 3,000 Preferred customers from the surrounding area. Further, these customers are very loyal and retention based on yearly rental records is about 95%. Acquisition cost associated with the Preferred membership is approximately $100 per customer.
• The discount rate for the industry is about 17%. The company’s average gross margin is 34%.
• Costs associated with the Preferred membership customer appreciation program include:
  • fixed marketing expenses (weekly direct mailings, local newspaper inserts targeting those with Preferred membership cards, emails, and communication) are about $3,500 per week; and
  • fixed marketing cost to continually train employees (high turnover) that is about $200 per week.

Please submit the following:

• Identify and list all assumptions necessary and create the CLV model in Excel.
• Answer and explain: Is this a good venture? Why or why not?