Question

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 and follows a Captive Pricing strategy. 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 $15.00. 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 8 years. The estimated, allocated one time marketing costs required to sell each initial razor in the first year only is $90.00 to cover sales, distribution and promotional costs. The profit margin on the blades is 40%. Using a Captive Pricing strategy, at $15.00 Gillette will be selling the razor at 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 planning tool and not necessarily be 100% accurate from an accounting standpoint)

In this example,

Answers:

(a) What is the estimated profit or loss per customer to Gillette in year 1?

(b) Using the concept of Customer Lifetime Value, does it or does it not make sense to introduce this new shaving system?

(c) Demonstrate why or why not by calculating the total estimated customer lifetime value?

Answer 1