Question

Cool Beans is a locally owned coffeeshop that competes with two large coffee chains, PlanetEuro and Frothies. Alicia, the owner, is considering two different marketing promotions and thinks that CLV analysis will help her decide the best course of action. An average specialty coffee drink sells for $3.94 and has a margin of 66%. One promotion is providing loyalty cards to her regular customers that would give them one free specialty coffee drink after 10 regular purchases. Alicia estimates that this will increase the frequency of their purchases by 9%. Currently, her customers average buying 2 specialty drinks per week.

The second promotion is targeted at new customers. She would offer a free specialty drink to incoming college freshmen by providing a coupon with their orientation packages. Because of her location near the college, she expects that 440 students will come to Cool Beans for a free trial. Of those, she anticipates that 13% will become regular customers who will purchase at least one specialty drink each week. The cost of printing and distributing the coupons is $122.

What would be the net incremental value in adding the loyalty program?

Answer 1

Calculation of per unit cost of speciality coffee drink:

=Selling price*(100%-margin%)

=3.94*34%

=$1.3396 per speciality drink

Total increase in profit per week per customer due to loyalty card scheme is:

=average buying per week*percentage increase in buying*per unit margin

=2*9%*(3.94*66%)

=$0.4681

Free speciality drink after 10 regular purchase. Hence as per loyalty program free drink to be provided after ? weeks:

=10/(2*109%)

=4.5872 weeks

Therefore, per week cost for free drink:

=cost per speciality drink/4.5872 weeks

=$1.3396/4.5872

=$0.2920

Therefore incremental profit for per week per customer under loyalty program:

=$0.4681-$0.2920

=$0.1761

Note: Since the question has asked only about loyalty program, second promotion for new customers has not been taken into consideration.