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.

Note: Please answer according to the question! Thank you.

Answer 1

Answer: