Pete Palermo is owner and proprietor of Pete’s Pizza Parlor. The business is mostly takeout, but he has a few booths for dine in. Pete’s Annual revenues are strong – he typically sees $350,000 in sales per year. His various costs, include a salary for him and his wife who also works at the restaurant, have also been high. He normally sees a 5% profit, or about $17,500.

Pete is taking some business courses at a local college. One of his classes in in marketing. He’ been hearing a lot about customer satisfaction and retention. His professor tells him that it costs 5 – 10 times more to attract a new customer than to keep a current customer. On a TV show, he recently learned that if you can retain 5% more of your customers than you currently do, you can increase your bottom line by 25%.

Pete has learned that in his line of business, the cost of maintaining a customer is $20 per year, while attracting a new customer is six times higher – $120. He has also learned that of these customers who stop patronizing a business, about 2/3 of them do so because of poor customer service, whereas less than 15% of them do so due to poor product quality.

Pete’s been thinking a lot about this. Ever since he opened his business, he’s been using the best ingredients and freshest toppings for his pizza. He’s not really paid too much attention to the quality of his customer service. He assumed that if the pizza was good, people would come back.

He serves about 1200 suburban families per year, but his retention rate is 75%. This means that every year, he retains 900 customers and loses (and must retain) the rest. This is not a bad retention rate, but he has room for improvement. He wonders if by focusing on a better customer experience, he might be able to improve his retention rate.

Please answer the following:

1. If Pete’s customer base remains at 12% and he increases his customer retention by 5%, what increase in profits will he see?

2. Given that Pete’s most recent profits were $17,500, what Percentage increase in profits does your answer to question 1 represent