Management Accounting Case Book

Hula Island: Strategic Decisions Involving Costs and Benefits of Internet Advertising Programs

Stephen C. HansenAssociate ProfessorNaval Postgraduate SchoolMonterey, CA

Tom AlbrightProfessor and Area Chair Financial ManagementNaval Postgraduate SchoolMonterey, CA

Authors note: The views expressed in this document are those of the authors and do not reflect the official policy or position of the Department of Defense or the U.S. Government.

INTRODUCTION

Hula Island is a boutique Internet shop, not a brick-and-mortar store, specializing in hand-painted glassware and Hawaiian-themed products.¹ Its customers are primarily women between the ages of 30 and 50 whose household earnings are above the national average. Hula Island caters to a unique niche market, providing its customers with a combination of artsy products, custom glassware, and vivid pictures at comparatively low prices. They also offer a generous return policy. To encourage impulse purchases, most items are priced between $15 and $30 with a very small markup. An extensive analysis of the company’s customer list shows that, on average, each new customer will generate approximately $3.50 in immediate profits and $25 in lifetime profits (the lifetime profits include the immediate profits).

The owner, who refers to himself as the Chief Coconut of Hula Island, has strong industry contacts and can usually obtain inventory items a month or so before the company’s competitors. As a result, Hula has a comparatively loyal customer ...