Question

1. Customer Retention and Profitability Pete Palermo is owner and proprietor of Pete's Pizza Parlor, a restaurant that specializes in pizza, wings, and submarine sandwiches. The business is mostly take-out, although there are a few booths available for those customers who want to dine in Pete has been in business for over 10 years, and his business is well established in an upper-middle-class suburb of a Northeastern U.S. city. Pete's annual revenues are stronghe typically sees $350.000 in sales per year. His various costs, including a salary for both him and his wife, who works at the restaurant and serves as bookkeeper, have also been high, and he normally sees about 5% profits -$17,500 this past year. Pete is taking some courses in business at the local college. One of his classes is in marketing, and he's been hearing a lot about the importance of customer satisfaction and retention. His professor has said that it is typically 5-10 times more expensive to attract a new customer than it is to keep a current customer. And on television recently, he heard world business leaders say that if you can retain 5% more of your customers than you currently do, your bottom-line profit will grow between 25% and 50%. All of this has caught Pete's interest, and he's been doing some research on the subject in the college's library. He's learned that in his type of business, maintaining a current patron runs about $20 per year, while attracting a new customer is six times higher $120. He's also learned that of those customers who stop patronizing a business, about two-thirds of them do so because of discourteous treatment they've received at that business, whereas less than 15% do so because of product quality. Pete's been thinking a lot about this. Ever since he's opened the business, he's been a stickler for using the very best ingredients and freshest toppings on his pizzas. He has thought very little about the type of treatment that his customers receive it has always seemed to him that if the pizza is good the customers will come back. But he knows that this clearly isn't the case. He serves about 1.200 suburban families in his area, and he feels that this is a comfortable customer base for his business. His retention rate per year is about 75%. In other words 25%, or 300 families, choose to stop using his restaurant in any given year, and he must replace those lost customers with 300 new ones. His retention rate is not bad for his type of business, but now Pete is wondering if he might, with some very small changes in the ways that his employees deal with patrons, be able to increase his retention rates. Please answer the following: S Pete's customer base remains at 1.200 and he increases his customer retention rate by 5%, what increase in profits will Pete see? (Please state your answer in a dollar amount.) 2. Given that Pete's most recent profits were $17.500, what percentage increase in profits does your answer to question 1 represent?

Answer 1

Hypothesis on Retention	(Cost / Margin) increase
5% increase in retention	25% - 50%
Cost	20 USD per patron yearly
Current Market Base (No)		1200
Current Retention		75%
No of customer retained		900
New Retention		80%
No of customer retained		960
In USD $		Yearly
Total Sales		350,000
Profit		17,500
Profit Margin		5%
1. Answer: Increase in profit / margin for pete's business will increase from 25% to 50% on the current profit of USD 17,500 with 5% increase in retention. The increase in profit with 5% increase in retention will be in the range of USD 4,375 to USD 8,750. In order to retain additional 5%, cost of USD 20 per petron per year will be required. Therefore, new profit will be in the range of USD 18,275 to USD 22,650.
Increase in Margin %	25%	50%
Increase in Margin USD	4,375	8,750
New Margin	21,875	26,250
Cost for retaining petron USD/ year	60
Number of retained petron	60
Cost for retaining petron USD yearly	3600
New Profit	18,275	22,650