Question

During the Internet boom, many dotcom companies signed exclusive deals with content aggregators in order to drive traffic to their site and rapidly build a customer base.   CDThen.com (an Internet CD retailer) and Yahoo! discussed one such deal.

In this one-year deal, CDThen.com would make an upfront payment of $14 million to Yahoo! In addition, CDThen.com would spend an average of $15,000 a day advertising on Yahoo!’s site.

In return, CDThen.com would be featured on 45% of the 40 million per day page views that Yahoo! generates.

CDThen.com believed that 1 in 300 (0.33%) of the page views generated by Yahoo! would result in a visit to its own website during the year of the deal. CDThen.com’s own experience has been that about 1.5% of visitors to its site actually buy CDs. While typical retention rates for CDThen.com’s customers is over 85% from year to year, management expected that customers generated through the Yahoo! deal would have a loyalty rate of 65% from year to year. Typical customers of CDThen.com buy $75 worth of CD’s per year from them at gross margins of 37%.

Would you recommend CDThen.com go ahead with this deal with Yahoo!?

Answer 1

		COSTS:
	A	Upfront payment	$14,000,000
	B	Advertising expenses	$                 5,475,000	(15000*365)
	C	Total expenses	$              19,475,000
	D	Number of visit to CDThen.com site	2,168,100,000	(0.33*0.45*40000000*365)
	E=0.015*D	Number of persons actually buy CD	32,521,500
	F	Purchase per person	$75
	G	Gross margin(37%)	$27.75
	H=G*D	Gross Income	$            902,471,625
		In addition loyality rate will be 65% from year to year
		Gross Income during the year through the deal will be $902 million and total cost during the year $19 million
		CDThen .com should go ahead with this deal.