In 2006, an online video rental service that offered a single subscription plan of $5.99 per month for 3 DVD rentals had 306,000 subscribers. This was an increase of 10% over the previous year, and 88,000 were new subscribers. They estimated that they spent $15.60 in acquiring each customer and that for each consumer they incurred annual variable costs (on fulfillment, technology, etc) of $32.

If you were to value their current customer base at the end of 2006, what would it be? (calculate CLV using the corrected CLV formula, apply to total number of subscribers).

Corrected CLV formula = CLV = m x ((1+ i)/(1+i -RR)) - AC

i = discount rate

RR = rentention rate

AC = acquisition costs

M = Contribution margin

Notes:

For purposes of this exercise, assume this business model can survive, and the discount rate as 10%. Don't forget to convert the revenue to annual figures! Be careful when calculating churn/retention; it is not straightforward.