Jerry Singleton founded Montana Mountain Biking (MMB) 16 years ago. MMB offers one-week guided mountain biking expeditions based in four Montana locations. Most of MMB's new customers hear about the company and its tours from existing customers. Many of MMB's customers come back every year for a mountainbiking expedition; about 80 percent of the riders on any given expedition are repeat customers.
Jerry is happy with this high repeat percentage, but he is worried that MMB is missing a large potential market. He has been reluctant to spend a lot of money on advertising. About 10 years ago, he spent $80,000 on a print advertising campaign that included ads in several outdoor interest and sports magazines, but the ads did not generate enough additional customers to cover the cost of the advertising.
Five years ago, a marketing consultant advised Jerry that the ads had not been placed well. The magazines did not reach the serious mountain bike enthusiast, which is MMB's true target market. After all, a casual mountain bike rider would probably not be drawn to a week-long expedition.
Another concern of Jerry's is that more than 90 percent of MMB's customers come from neighboring states. Jerry has always thought that MMB was not reaching the sizable market of serious mountain bike enthusiasts in California. He talked to the marketing consultant about buying an address list and sending out a promotional mailing, but producing and mailing the letters seemed too expensive. The cost of renting the list was $0.10 per name, but the printing and mailing were $4 per letter. There were 60,000 addresses on the list, and the consultant told him to expect a conversion rate of between 1 percent and 3 percent. At best, the mailing would yield 1800 new customers and MMB's profit on the one-week expedition was only about $100 per customer. It looked like the conversion cost would be about $246,000 (60,000 x $4.10) to obtain a profit of...