Fluent Essays

Preliminaries On average this should take between approximately 3 to 4 hours to complete.. Do not consult any online resources, other students or resources. I expect that you will do very well on this. given the quality of work that has been submitted thus far. Having said this, it is challenging and requires careful thought and application of course principles. Take your time and do your best! · Please show your workings clearly. We cannot award credit for something we do not understand. If you want to report computations you did in Excel, you can create appropriate tables in Excel and copy and paste them as exhibits into your Word file. For each entry in your table, make sure you write out the equation you used, where in the case you found the entry, or what assumption the entry is based on. Do not just show numerical entries without explanation. We won’t be able to figure out where the numbers came from, even if they seem obvious to you. · The short answer questions follow those for the case. There questions relate to in-class discussion, readings and lecture material. Please answer these questions as briefly as possible. Please read the Vermont Teddy Bear case carefully. (Note that we have redacted some information to shorten the case and to reduce ambiguity.) Answer the following four specific questions. Question 1 (10 points) Please compute the acquisition cost (i.e., the cost to acquire a single new customer) for Calyx and Corolla (C&C). Notes: 1. Assume customers are acquired only by sending catalogs to names from rented mailing lists. Ignore the costs of other tools such as advertising. Ignore acquisition by sending catalogs to flower recipients. A prospect becomes a customer when that prospect receives a catalog and picks up the phone to place an order. For this question, ignore the costs and revenues of anything that happens after the prospect picks up the phone and starts dialing. 2. Every prospect that picks up the phone to place an initial order is assumed to complete that order, and hence become a customer. The term “yield” in the case refers to the percentage of prospects that really become C&C customers. (After becoming a customer, “yield” indicates the probability that a customer responds to receiving a catalog by placing an order.) 3. Ignore any costs that are not explicitly stated in the case. 4. Show your work and clearly state your assumptions. Write out all your equations in the greatest possible detail. If you make assumptions, state those clearly and explain why and how you made them wherever appropriate. Question 2 (20 points) Please compute the Customer Lifetime Value for the Calyx and Corolla customer. Notes: 1. Use the acquisition cost from Question 1. 2. Assume a retention rate of 90\% per year (we know that’s unrealistically high, but let’s assume this anyway). 3. Assume Calyx & Corolla has an infinite time horizon. 4. Assume that cash flows do not need to be discounted in time. Ignore all time-vKEL138 Revised November 8, 2005 ©2005 by the Kellogg School of Management, Northwestern University. This case was prepared by Professor Alexander Chernev. ALEXANDER CHERNEV Vermont Teddy Bear Company: Calyx & Corolla On September 2, 2003, the Vermont Teddy Bear Company announced the acquisition of Ca- lyx & Corolla, a catalog company that ships fresh flowers direct from growers to customers. Prior to the acquisition of Calyx & Corolla, the Vermont Teddy Bear Company had focused on popular gift alternatives to flowers. In addition to its core business of manufacturing and marketing high- end gift teddy bears, the Vermont Teddy Bear Company operated TastyGram, a gourmet foods catalog launched in October 2002, and PajamaGram, a gift delivery business launched in April 2002. Floral Distribution Industry In 2003, flower distribution in the United States was a $19 billion industry that included more than 75,000 florists. Flowers are purchased for a variety of occasions, including weddings, funer- als, birthdays, anniversaries, Valentine’s Day, and Mother’s Day. In addition to special occasions, flowers are also purchased to alleviate guilt and to decorate homes. The demand for flowers is seasonal, with high peaks around holidays and much lower sales during the rest of the year. The perishability of flowers and the seasonality of demand make effi- cient distribution crucial for the industry. Usually, the distribution process begins with growers selling flowers to distributors. Some distributors, such as Calyx & Corolla, send the flowers di- rectly from the grower to consumers using shippers such as Federal Express. Most distributors, however, sell their flowers to wholesalers who then sell the flowers to retailers at a substantial mark-up. Given this chain of distribution, a $1 flower could reach the customer two to five days after being cut and be sold for around $5. Retailers also apply an additional delivery fee. Calyx & Corolla Calyx & Corolla was founded in 1988 by Ruth Owades. After graduating from Harvard Busi- ness School in 1975, Owades joined the CML Group, a direct mail retailer, as director of market- Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call 800-545- 7685 (or 617-783-7600 outside the United States or Canada) or e-mail [email protected] No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Kellogg School of Management. VERMONT TEDDY BEAR: CALYX & COROLLA KEL138 ing. Two years later, she launched Gardener’s Eden, a catalogue offering gardening accessories. In 1982, Owades sold Gardener’s Eden to Williams