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There are two parts to the AOL story In the rst place, AOL has to spend a lot of money to acquire customers It places ads on TV, sends out CDs in the mail, puts CDs in tens of thousands of stores in POS displays, and recruits customers through partnership arrangements This must be expensive I would imagine that it costs AOL at least $100 to acquire a new customer Once acquired, however, these customers pay AOL $23 per month forever What is the marginal cost of servicing a new customer Not very much Once you have the system and software in place, it is not that expensive to add a new customer perhaps $5 per customer per month At that rate, AOL is doing very well if it is spending $100 to acquire customers who produce $18 in net revenue per month.

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The initial tests address several variations of the channel breakout entry. First examined are close-only channel breakout models, in which the price channels or bands are determined using only closing prices. A model involving breakouts that occur beyond the highest high or lowest low will also be studied. In these models, the price channels approach the traditional notion of support and resistance.

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Test I: Close-Only Channel Breakout with Entry on Market Order at Next Open, No Z ransaction Costs The rules are: If the current position is either short or flat and the market closes above the highest close of the last n days, then buy tomorrow s open Likewise, If the current position is either long or flat and the market closes below the lowest close of the preceding n days, then sell (go short at) tomorrow s open The channel breakout entry model has only one parameter, the look-back (a) The number of contracts to buy or sell (nconrracfs) was chosen to produce, for the market being traded, an effective dollar volatility approximately equal to that of two new S&P 500 contracts at the end of 1998 Exits occur either when a breakout entry reverses an existing position or when the standard exit closes out the trade, ie.

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Of course, some of these new customers do not stay They cancel after a few months This is true of all customers and all types of companies That is where the referrals come in Referrals are much less likely to cancel than people who are recruited by other means Why Because they know someone who is on AOL the person who referred them They may have joined to send that person email They will some day have to face the question, Well, how do you like AOL They don t want to have to say, Well, I tried it, but I couldn t get it to work or I didn t like it or It was a waste of my money They are not going to want to say these things to their friends So they are more likely to remain as customers than people who have no such connections.

, when a money management stop is triggered, a profit target is hit, or the position has been open more than a specified number of days (bars), whichever comes first The money management stop is computed as the entry price plus (for short positions) or minus (for long positions) some multiple (a parameter, mmsrp) of the 50-bar average true range Profit target limits are at the entry price plus (long) or minus (short) another multiple (ptlim) of the same average true range Finally, an exit at close order (a form of market order) is posted when a position has been held for more than a specified number of days (manhold) All exit orders are close-only, ie, executed only at the close: this restriction avoids ambiguous simulations when testing entries with intrabar limits or stops.

For this reason, AOL can afford to give away a little money to acquire such people, and so can you..

Were exits not restricted to the close, such cases would involve the posting of multiple intrabar orders Simulations become indeterminate and results untrustworthy when multiple intrabar orders are issued: The course of prices throughout the period represented by the bar, and hence the sequence of order executions, is unknown The average true range (a measure of volatility) is calculated as the mean of the true range of each of a specified number of previous bars (in this case, 50) The true range is the highest of the day s high minus the day s low, the day s high minus the previous day s close, or the previous day s close minus the day s low Below is a C+ + implementation of the close-only channel breakout entry model mated with the standard exit strategy.

Year 1 Customers Retention rate Spending rate Revenue Cost rate Costs Acquisition/retention cost ($120/$20) Total costs Pro t Discount rate NPV of pro t Cumulative NPV of pro t Lifetime value 100,000 60% $275 $27,500,000 60% $16,500,000 $12,000,000 $28,500,000 ($1,000,000) 1.00 ($1,000,000) ($1,000,000) ($10) Year 2 60,000 65% $285 $17,100,000 55% $ 9,405,000 $ 1,200,000 $10,605,000 $6,495,000 1.07 $6,058,769 $5,058,769 $50.59 Year 3 39,000 70% $295 $11,505,000 54% $6,212,700 $ 780,000 $6,992,700 $4,512,300 1.15 $3,926,525 $8,985,294 $89.85

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