You own a business magazine CY. At the beginning of year 1, you have 300,000 subscribers and 700,000 nonsubscribers who are considered pos- sible subscribers in the future. Determine whether it is a good idea to give prospective subscribers their first year subscription for free. The file Customerdata.xlsx gives for a random sample of subscribers the number of years they subscribed. A sample of the data is shown in Figure 21-7. For example, Person 2 subscribed for six years before canceling, and Person 13 has subscribed for one year and is still a subscriber. To begin, use this data to estimate the annual retention rate, assuming that retention rate does not depend on how long a person has subscribed.

a. Currently the annual subscription fee is $55 and you make $50 annual profit per subscriber (based on beginning of year subscrib- ers.) You discount cash flows at 10 percent per year. At present 5 percent of the nonsubscribers at the beginning of a year become subscribers at the beginning of the next year. At the beginning of each year, 20,000 new nonsubscribers enter the market. After a person stops being a subscriber, assume he will never subscribe again. Determine the value of the status quo. Use 20 years and assume at the beginning of year 21 each current subscriber is credited with a salvage value based on the Customer Value template.

b. CY is considering giving new subscribers their first year for free. You are not sure how this will increase the fraction of nonsubscribers you get each year above the current level of 5 percent, but you estimate the new recruitment percentage will be normally distributed with a mean of 6 percent and a standard deviation of 1 percent. Assume that the recruitment rate of new subscribers will be the same each year. Also assume that all cash flows occur at the beginning of a year and there is no customer acquisition cost. Use the output from 10,000 iterations of a Monte Carlo simulation to determine whether you should give the new subscribers the first year for free.