## CLV analysis

CLV analysis practice 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.

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