Question

Media outlets often have websites that provide in-depth coverage of news and events. Portions of these websites are restricted to members who pay a monthly subscription to gain access to exclusive news and commentary. These websites typically offer a free trial period to introduce viewers to the website. Assume that during a recent fiscal year, one outlet spent $2,368,800 on a promotional campaign for its website that offered two free months of service for new subscribers. In addition, assume the following information:
Number of months an average new customer stays with the service (including the two free months) 22 months
Revenue per month per customer subscription $21
Variable cost per month per customer subscription $7

Determine the number of new customer accounts needed to break even on the cost of the promotional campaign. In forming your answer:

a. treat the cost of the promotional campaign as a fixed cost
b. treat the revenue less variable cost per account for the subscription period as the unit contribution margin.

Answer 1

Answer: 8,905 customers

Explanation:

Breakeven = Fixed cost / Contribution Margin

Fixed cost = $2,368,800

Contribution margin = Revenue - Variable cost

Revenue will be for 20 months because there were 2 free months:

= 21 * 20

= $420 per customer

Variable cost = 7 * 22

= $154

Contribution margin = 420 - 154

= $266

Breakeven = 2,368,800 / 266

= 8,905 customers