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BUS 326 Case #1 Orange PLC.

Customer Profitability

It has been reported that Canada and British Columbia in particular have the highest cell phone user rates in North America. While there are three primary service providers in the market, Shaw, Bell Mobility, and TELUS, price competition between these companies has not reduced the cost of service to consumers. Orange is a UK based cell phone provider that is evaluating the opportunity to enter the Canadian marketplace and it has identified British Columbia as its primary launch region. US cell phone subscribers pay 40% lower rate fees on standard airtime, roaming airtime, and data usage for text messaging and internet browsing. To properly estimate the future profit potential of entering the BC cell phone market, Orange must determine the long term profitability potential of this target market. As a result, Orange has been tracking the behavior of 100,000 cell phone customers in the British Columbia region. Over a period of three months starting September 2012, the average gross contribution from this group of customers is expected to be $275.00 per month. The annual marketing and the acquisition cost per customer is estimated to be $15.00 and $90.00 respectively. Customers typically sign-up for 1 year, 2 year, or 3 years contract as follows: 10%, 20%, and 70% respectively. Furthermore, the retention rate depends on the type of contract and age of the subscriber. It is estimated that 35% of cell phone subscribers will be between 12 and 25 years of age. The remaining subscribers will be over 25 years of age. Younger buyers typically enter 1 year contracts with basic service plans that generate gross contributions of $45.00 per month. These subscribers are a highly prices sensitive, yet are willing to pay more to have the latest, coolest phone. With the introduction of telephone number portability, it is now expected that only 1 in 3 will stay with the current cell phone provider when their plan expires. Older adults are less price sensitive and some are less fashion conscious. As a result 85% stay with the current provider when their existing plan expires. Contract length for these buyers reflects their need to have the newest phone. Latest phone seekers prefer two year terms and represent about 40% of the mature adult subscribers. Furthermore, the gross contribution per month depends on whether or not the cell phone is used for business or pleasure. Business users make up 50% of the mature adult users and generate a gross contribution of $310.00 per month whereas personal users generate a gross contribution of $125.00 per month. After returning from a meeting with the company bankers, senior management was told the risk adjusted discount rate for the firm is 6.75% per year or .0545 % per month. Assuming that the discount rate, retention rate, and gross contribution are constant over time, calculate the profitability of each buyer class and the overall average CLV of a customer for each age cohort. Also determine the profit potential to Orange if it was to pursue an expansion into the BC cell phone marketplace.

BUS 326 Case #1 Orange PLC. Customer Profitability


Required: 1) Prepare an appendix that demonstrates the profitability of each demographic buyer class. 2) Prepare an appendix that demonstrates the profitability each segment type (consider psychographics and demongraphics) 3) Prepare a summary appendix that compares the profitability of each group. 4) Provide an Executive Summary that discusses what you have learned and your recommendations.