Suppose Dave is a junior manager of Hollywood Gym at NYC. Thereare 1000 members to be acquired. Monthly membership fee is $25,monthly variable cost (including retention cost) is $10 andacquisition cost is $30. The membership renewal data for the pastseveral years shows average monthly retention rate is 80%.
The company executive provides some limited budget for a newmarketing campaign. According to Dave’s estimation, it costs$3/month to increase the monthly retention rate by 10% (thus upto88%) by giving them coupons and gifts.  Â
Therefore, within the limitation of the marketing budget, he caneither A) spend $3 per person per month to increase the retentionrate 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%).
??? =
(??????? ????????? ????) Ă—(1+???????? ????) (1+???????? ?????????????? ????)
???????????? ????
? The CLV formula above looks different from that in the lectureslide. Why?
2) Compute CLV for 1-year horizon (12 months) and compare theresult with that in 1). In this case, please use Excel.
