Question

Suppose Dave is a junior manager of Hollywood Gym at NYC. There are 1000 members to be acquired. Monthly membership fee is $25, monthly variable cost (including retention cost) is $10 and acquisition cost is $30. The membership renewal data for the past several years shows average monthly retention rate is 80%.

The company executive provides some limited budget for a new marketing campaign. According to Dave’s estimation, it costs $3/month to increase the monthly retention rate by 10% (thus upto 88%) by giving them coupons and gifts.   

Therefore, within the limitation of the marketing budget, he can either A) spend $3 per person per month to increase the retention rate to 88%, or B) acquire 10% more new members.

Which would you recommend to Dave between A) and B)?

1) Use the following formula (annual discount rate=10%).


??? =
(??????? −???????? ????) ×(1+???????? ????) (1+???????? ???? −????????? ????)
−??????????? ????


※ The CLV formula above looks different from that in the lecture slide. Why?


2) Compute CLV for 1-year horizon (12 months) and compare the result with that in 1). In this case, please use Excel.

Answer 1

Data provided:
Particulars	Situation A	Situation B
Retention rate	80%	88%
Number of members per month (1000 is 100%)	800	880
Membership fee per member	25	25
Variable cost per member	10	10
Variable cost per member after 80% retention rate	-	3
Acquisition cost/ fixed cost	30	30
Evaluation of situations
Particulars	Situation A	Situation B
Membership fees/ Revenue	20,000	22,000
Retention fee/ Variable cost	8,000	8,800
Variable cost after 80% retention	-	2,640
Contribution per month	12,000	10,560
Acquisition cost	30	30
Net profit	11,970	10,530
As per the above calculation, Situation A is recommended.
CLV computations as per the formula given	Situation A	Situation B
(Revenue - Variable cost) (A)	12000	10560
(1 + discount rate) (B)	1.1	1.1
(1 + discount rate - retention rate) (C)	0.3	0.22
Acquisition cost (D)	30	30
CLV for one month (A(*B*C)-D)	3930	2525.52
CLV for one member one month (CLV per month/No of members)	4.91	2.87
CLV for 1 year horizon	Situation A	Situation B
CLV computations as per the formula given
12*(Revenue per month - Variable cost per month) (A)	144000	126720
(1 + discount rate) (B)	1.1	1.1
(1 + discount rate - retention rate) (C)	0.3	0.22
Acquisition cost per month * 12 (D)	360	360
CLV for 1 year (A(*B*C)-D)	47,160	30,306
CLV for one member one year (CLV per month/No of members)	58.95	34.44
CLV of Situation A is better than Situation B in both the cases i.e. when compared for a month or year.