Problem
Harrington Financial provides financial advice and management to individuals. They must decide to target one of two segments.
Domestic clients. This segment is made up of customers who live and work in the UK. On average, they pay Harrington £44,000 annually and cost £10,000 to serve annually. They cost £5,000 to acquire and churn at a rate of 26% per year.
International clients. This segment is made up of customers who live and work in the UK part of the time but also have income and residence in other countries. Since this often leads to complex tax situations, a specialist team works with these clients. On average, they pay Harrington £42,500 annually and cost £20,000 to serve per year. They cost £4,000 to acquire and churn at a rate of 15% per year.
Assume that payment occurs at the beginning of the year (at the time the customer signs up for a plan), a discount rate of 10% and that the segments are the same size (there is the same number of customers in each segment).
1. With the goal of maximizing long-term profits, which segment would you suggest that Harrington target? Why?
2. Now imagine that for the domestic segment, Harrington is considering running a promotional campaign that is expected to decrease the churn rate of these customers to 25% per year. The campaign will cost £3000 per customer to run. Would you suggest that they do this campaign? Why or why not?