Suppose Dave is a junior manager of Hollywood Gym at NYC. There are 1000 members to...

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Accounting

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.

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%).

??? =
(??????? ????????? ????) ×(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.

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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 See Answer

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