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Maru Batting Center Customer Lifetime Value Case Solution

Solution Id	Length	Case Author	Case Publisher
2489	6128 Words (60 Pages)	Julie Hennessy, Evan Meagher	Kellogg School of Management : KEL688

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People may use the batting cages at Maru Batting Center to hone their skills in baseball and softball. Customers may plan training sessions up to 24 hours in advance because of a corporate approach that allows for flexibility. Part-time workers allow a corporation to more easily fulfill its appointment schedules than full-time employees. The organization provides four unique service levels: Little League, Summer Slugger, Elite, and Entertainment to suit the demands of a wide spectrum of clients. Youngsters between the ages of six and fifteen play Little League baseball. There is a 25% attrition rate in this group. Maru Batting Center (MBC) requires two part-time instructors and a coach, all of whom get an hourly fee in the 3000s each day. MBC costs the parents Yen 6,500 per child. Yen 1,000 in advertising expenditures is required to reach a Little Leaguer, but only 10% of those reached become regular players.

Following questions are answered in this case study solution

What is the customer acquisition cost to Maru Batting Center for the different types of customers?
Without discounting cash flows to take into account the time value of money, how soon will MBC break even on the different types of customers? In all cases, assume that revenues and variable costs to staff the cages occur on an ongoing basis but that the acquisition costs are a one-time event.
Taking into account the time value of money and assuming that 100 percent of a customer segment will have experienced attrition once the net present value of annual profits per customer falls below ¥100, what is the lifetime value to MBC of the following customers? Assume that a customer’s lifetime extends up to and including the year in which the net present value of annual profits falls below ¥100.
Which is the most attractive customer segment for MBC to target? Explain your reasoning.
MBC has been approached by Little League representatives from the nearby Chiyoda ward who are eager to gain the jersey subsidy the Minato ward has enjoyed due to the company’s sponsorship. Because the parents of Chiyoda Little Leaguers will have to travel a greater distance, Maru believes there will be a lower response rate (8 percent) and a lower retention rate (65 percent), which she can make up for by purchasing slightly lower-quality jerseys, reducing the cost of sponsorship to just ¥600 per player. However, the Chiyoda ward representatives demand that theirs be the only ward receiving such a sponsorship, which means MBC must choose between the two wards. The Chiyoda representatives argue that because their ward has twice the number of Little League customers, it is more attractive than the Minato ward. Should MBC pursue the Chiyoda ward sponsorship? Explain your reasoning.
Maru’s brother suggested she focus on the Elite Ballplayers segment, targeting it by offering a ¥500 discount on all future purchases to Elite Ballplayers who purchase at least twenty batting cage hours in Year 1. (Assume all Elite Ballplayer customers book exactly twenty hours each year. Also assume that this discount is made on top of the gala event option above, instead of the magazine option for acquiring Elite Ballplayers.) Although this will decrease the amount MBC can bill Elite Ballplayers (from ¥7,500 per hour to ¥7,000 per hour from Year 2 onward), Maru believes it will increase the retention rate of these customers to 75 percent immediately. Should MBC offer this promotion? Explain your reasoning.
Alternatively, Maru has considered ignoring her brother’s advice and targeting the Elite Ballplayers segment by attempting to increase the launch party’s response rate. Instead of offering customers a discount from Year 2 onward, MBC could offer each launch party attendee who commits to purchasing at least twenty batting cage hours a free professional-grade baseball bat with the Yakult Swallows logo. This would cost Maru Batting Center an additional ¥10,000 for each new Elite Ballplayer customer, but Maru Batting Center believes it would increase the launch party’s invitation response rate to 29 percent. Should she offer this promotion? Explain your reasoning.

Case Analysis for Maru Batting Center Customer Lifetime Value

1. What is the customer acquisition cost to Maru Batting Center for the different types of customers?

A person who plays baseball in the Little League. "Little Leaguer"

A Summer Slugger

If the advertisement is published by MBC in a local magazine aimed toward baseball aficionados, then the winner of this contest will receive an Elite Ballplayer.

An Elite Ballplayer made an offer to MBC to hold the gala event for free on the condition that the company compiles a client list and extends invitations to all potential clients.

An Acquisition of a Customer Who Is Interested in Taking Part in Entertainment Activities The cost of establishing contact is determined by taking the overall cost of doing so and dividing it by the proportion of persons who do make contact.

Little Leaguers: Equation = ¥10,000.

0 Summer Sluggers: Equation = ¥10,000.

0 An important announcement for all of the professional ballplayers out there: The correct answer to the equation is 60,000.

0 Equation = 50,000 dollars for members of the Elite Ballplayers' Association (gala). Members of the EBA.

Those in Search of Entertainment Ought to Take into Consideration the Following Recipe: 2,000

	Little Leaguers	Summer Sluggers	Elite Ballplayers (Print Ad)	Elite Ballplayers (Party)	Entertainment Seekers
Contact Cost	1000	1500	300	12500	50
Response Rate	10.0%	15.0%	0.5%	25.0%	2.5%
Acquisition Cost	10000	10000	60000	50000	2000

2. Without discounting cash flows to take into account the time value of money, how soon will MBC break even on the different types of customers? In all cases, assume that revenues and variable costs to staff the cages occur on an ongoing basis but that the acquisition costs are a one-time event.

a. A Little Leaguer

b. A Summer Slugger

c. An Elite Ballplayer if MBC places the ad in the local baseball enthusiast’s magazine

d. An Elite Ballplayer if MBC purchases the list and invites all target customers to the gala event

e. An Entertainment Seeker

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

Year 10

Year 11

Year 12

Year 13

Year 14

Year 15

Year 16

Year 17

Year 18

Year 19

Year 20

Year 21

Year 22

Year 23

Little Leaguers

Hourly Revenues

6500

Hourly Costs

6000

Hourly Margin

500

# of Annual Hours

Annual Margin ¥

5000

Survival Rate

100%

75.0%

56.3%

42.2%

31.6%

23.7%

17.8%

13.3%

10.0%

7.5%

5.6%

4.2%

3.2%

2.4%

1.8%

1.3%

1.0%

0.8%

0.6%

0.4%

0.3%

0.2%

Customer Acquisition Cost

10000

Annual Profit

-5000

3750

2813

2109

1582

1187

890

667

501

375

282

211

158

119

Cumulative Profit to Date

-5000

-1250

1563

3672

5254

6440

7330

7998

8498

8874

9155

9366

9525

9644

9733

9800

9850

9887

9915

9937

9952

9964

9973

Break even in third year

Attrition rate

25%

Retention rate

75%

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

Year 10

Year 11

Year 12

Year 13

Year 14

Year 15

Year 16

Year 17

Year 18

Year 19

Year 20

Year 21

Year 22

Year 23

Summer Sluggers

Hourly Revenues

3000

Hourly Costs

1500

Hourly Margin

1500

# of Annual Hours

Annual Margin ¥

6000

Survival Rate

100%

50.0%

25.0%

12.5%

6.3%

3.1%

1.6%

0.8%

0.4%

0.2%

0.1%

0.0%

Customer Acquisition Cost

10000

Annual Profit

-4000

3000

1500

750

375

187.5

93.8

46.9

23.4

11.7

5.9

2.9

1.5

0.7

0.4

0.2

0.1

0.0

Cumulative Profit to Date

-4000

-1000

500

1250

1625

1813

1906

1953

1977

1988

1994

1997

1999

2000

Attrition rate

50%

Break even in third year

Retention rate

50%

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

Year 10

Year 11

Year 12

Year 13

Year 14

Year 15

Year 16

Year 17

Year 18

Year 19

Year 20

Year 21

Year 22

Year 23

Elite Ballplayers (Print Ad)

Hourly Revenues

7500

Hourly Costs

6000

Hourly Margin

1500

# of Annual Hours

Annual Margin ¥

30000

Survival Rate

100%

60.0%

36.0%

21.6%

13.0%

7.8%

4.7%

2.8%

1.7%

1.0%

0.6%

0.4%

0.2%

0.1%

0.0%

Customer Acquisition Cost

60000

Annual Profit

-30000

18000

10800

6480

3888

2333

1400

840

504

302

181

109

Cumulative Profit to Date

-30000

-12000

-1200

5280

9168

11501

12900

13740

14244

14547

14728

14837

14902

14941

14965

14979

14987

14992

14995

14997

14998

14999

Break even in fourth year

Attrition rate

40%

Retention rate

60%

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

Year 10

Year 11

Year 12

Year 13

Year 14

Year 15

Year 16

Year 17

Year 18

Year 19

Year 20

Year 21

Year 22

Year 23

Elite Ballplayers (Party)

Hourly Revenues

7500

Hourly Costs

6000

Hourly Margin

1500

# of Annual Hours

Annual Margin ¥

30000

Survival Rate

100%

60.0%

36.0%

21.6%

13.0%

7.8%

4.7%

2.8%

1.7%

1.0%

0.6%

0.4%

0.2%

0.1%

0.0%

Customer Acquisition Cost

50000

Annual Profit

-20000

18000

10800

6480

3888

2333

1400

840

504

302

181

109

Cumulative Profit to Date

-20000

-2000

8800

15280

19168

21501

22900

23740

24244

24547

24728

24837

24902

24941

24965

24979

24987

24992

24995

24997

24998

24999

Break even in third year

Attrition rate

40%

Retention rate

60%

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

Year 10

Year 11

Year 12

Year 13

Year 14

Year 15

Year 16

Year 17

Year 18

Year 19

Year 20

Year 21

Year 22

Year 23

Entertainment Seekers

Hourly Revenues

4000

Hourly Costs

3000

Hourly Margin

1000

# of Annual Hours

1.5

Annual Margin ¥

1500

Survival Rate

100%

35.0%

12.3%

4.3%

1.5%

0.5%

0.2%

0.1%

0.0%

Customer Acquisition Cost

2000

Annual Profit

-500

525

184

Cumulative Profit to Date

-500

209

273

296

303

306

307

308

Break even in second year

Attrition rate

65%

Retention rate

35%

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Maru Batting Center Customer Lifetime Value Case Solution

Following questions are answered in this case study solution

Case Analysis for Maru Batting Center Customer Lifetime Value

1. What is the customer acquisition cost to Maru Batting Center for the different types of customers?

2. Without discounting cash flows to take into account the time value of money, how soon will MBC break even on the different types of customers? In all cases, assume that revenues and variable costs to staff the cages occur on an ongoing basis but that the acquisition costs are a one-time event.

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Maru Batting Center Customer Lifetime Value Case Solution

Following questions are answered in this case study solution

Case Analysis for Maru Batting Center Customer Lifetime Value

1. What is the customer acquisition cost to Maru Batting Center for the different types of customers?

2. Without discounting cash flows to take into account the time value of money, how soon will MBC break even on the different types of customers? In all cases, assume that revenues and variable costs to staff the cages occur on an ongoing basis but that the acquisition costs are a one-time event.

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