Memorandum
To: Sonic Founders Tim Waters & Erin Bray and CEO Hannah Fitzgerald From: Cliff Burrows
Class and Section: MBAD 518 Team: None
Date: 8-27-13
Re: Sonik CD word count: 492
Executive Summary
Our company has to determine a growth strategy apposite to the developing music industry. Major retailers and digital downloads have moved in to erode our once-niche position. The company should stay true to its founding values and pursue the niche market, as it is most profitable, but also find ways to expand in to new genres.
Situation Overview:
Hannah needs to make a decision about the strategic future of Sonic CD. She needs to select one of three growth options: Continue serving a niche market, move towards a mass-market retailing, or move forward as a distribution company only. Sonic CD is currently facing financial pressures from increased competition and eroding margins. Additionally, rapidly changing technology is transforming the industry and how consumers buy music.
Action Recommendations:
Sonik CD should continue competing as a niche player. To counter stagnating market in the jazz genre, Sonik CD should consider changing their marketing target toward other genres in order to continue growth. If the Jazz/Classical market is indeed captured and can no longer grow, focus on retention of the niche and expansion beyond base genres. The potential value of this course of action is $321.51 LCV. With a 95% retention investment in place, that value jumps to $439.43. Only 4,240 new customers need be acquired to break even on that investment. The value range based on these growth estimates over a 5-year period is $129M-176M. These figures assume that the entire $40 subscription fee is applied to the cost of member benefits.
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There are some costs and risks associated with this course of action. First, there is the retention investment of .5M. It may or may not work. Second, there is the risk in the cost of attracting new customers. It may increase 30-50% in the coming years due to limited market size and increased competition. Depending on the firm’s analysis and tolerance for risk, a second good option is to take the exclusive distribution deal with AmeriNet Radio. The distribution deal with AmeriNet would help Sonik CD gain a large customer base quickly. The downside is that the customer pool is very limited to infrequent buyers. I value this deal at 19.8M/year for a 5-year total of $99M. AmeriNet has a large customer base, long track record, and lots of data. The risk here is very low.
Justification of Action Recommendations
This is the best course of action because it maximizes value for Sonic CD. Assuming we can grow our business to capture other genres and subscriber growth will be 20-30,000 per year, we will maximize revenues from customers—especially if our retention investment works. Additionally, this course of action does not immediately preclude us from capturing extra revenues from other companies for coordinating distribution of goods during the holiday season, or entertaining a buy-out.
Exhibits –
Exhibit 1: Custome LCV Calculations
Exhibit 2: 5-Year growth-value ranges for niche market
Exhibit 3: 5-Year growth-value for mass market
Others
Exhibit 1:
Customer LCV Calculations| Distribution Valuations|
The Essay on Customers In This Category Year Customer Profit
Q 1) Less than $50 year 0 year 1 year 2 year 3 year 4 year 5 0 1 2 3 4 5 customers 4657 4046 1918 970 927 820 revenue 148278. 9 151464. 8 109129. 4 71418. 95 68788. 16 58617. 59 Profit (without mailing cost) 62277. 13 63615. 22 45834. 33 29995. 96 28891. 03 24619. 39 mailing cost 3958. 45 27942 27942 27942 27942 27942 net profit 58318. 68 35673. 22 17892. 33 2053. 959 949. 0272 -3322. 61 discount ...
| Margin| Retain %| Discount %| Margin Multiplier| LCV| # Of Customers| Value of deal| Niche| $78.61 | 0.9| 1.12| 4.09| $321.51| |
Mass Mkt| $15 | 0.6| 1.12| 1.15| $17.25| |
Niche+.5M| 78.61| 0.95| 1.12| 5.59| $439.43| |
Distribution| $17 | 1| 1.12| 8.33| $141.61| 125,000| $17,701,250.00| Exclusive Distribution| 22| 1| 1.12| 8.33| $183.26| 125,000|
$22,907,500.00|
Exhibit 2:
5-Year growth-value ranges for conservative niche market|
| Customers| LCV = $321.51 | LCV = $439.43|
Year 1| 40000| $12,860,400.00 | $17,577,200.00 |
Year 2| 60000| $19,290,600.00 | $26,365,800.00 |
Year 3| 80000| $25,720,800.00 | $35,154,400.00 |
Year 4| 100000| $32,151,000.00 | $43,943,000.00 |
Year 5| 120000| $38,581,200.00 | $52,731,600.00 |
| Total=| $128,604,000.00 | $175,772,000.00 |
| | Assumes 90% retention| Assumes 95% retention|
| | | |
5-Year growth-value ranges for aggressive niche market|
| Customers| LCV = $321.51 | LCV = $439.43|
Year 1| 40000| $12,860,400.00 | $17,577,200.00 |
Year 2| 70000| $22,505,700.00 | $30,760,100.00 |
Year 3| 100000| $32,151,000.00 | $43,943,000.00 |
Year 4| 130000| $41,796,300.00 | $57,125,900.00 |
Year 5| 150000| $48,226,500.00 | $65,914,500.00 |
| Total=| $157,539,900.00 | $215,320,700.00 |
| | Assumes 90% retention| Assumes 95% retention|
| | | |
Exhibit 3:
5-Year growth-value for mass market|
| Customers| LCV* = $2.88 |
Year 1| 200,000| $576,000.00 |
Year 2| 400,000| $1,152,000.00 |
Year 3| 600,000| $1,728,000.00 |
Year 4| 800,000| $2,304,000.00 |
Year 5| 1,000,000| $2,880,000.00 |
| Total=| $8,640,000.00 |
*LCV reflects acquisition cost
