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A magazine company hired you to calculate the lifetime value of its subscribers. A subscriber pays...

A magazine company hired you to calculate the lifetime value of its subscribers. A subscriber pays for the whole year at the beginning of the subscription period. After each year the subscribers decide to either to pay for another year or to cancel the subscription. During a year, a subscriber receives magazines each week. On average, the profit (contribution margin) from each subscriber is $20 per year. The average yearly retention rate is 30%. The CFO of the company believes that the annual discount rate is 8%. How much is the value of each subscriber to this magazine company? Hint: You can use either the spreadsheet method or use the quick back of the envelop formula to solve this problem. If you use the spreadsheet method, do the calculations for at least 10 periods (years).

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Answer #1

Solution:

Given:retention rate=30%

   Discount rate=8%

All We need to do is calculated the value by profit per year * retention

The values of each year are discounted at 8% and

Net present value is calculated by adding the present values for all 10 years.

Spread Sheet Method Retention rate Profit Per Subscriber Present Values 20 65.555555556 1.8 1.543209877 0.42866941 0.162 0.119074836 0.0486 0.033076343 0.01458 0.009187873 0.004374 0.002552187 0.0013122 0.000708941 0.00039366 0.000196928 0.0000547 Year 100 20 2 9 2.7 0.81 0.243 0.0729 0.02187 0.006561 0.0019683 10 0.00059049 0.54 9 0.000118098 Net present value for each subscriber 27.69228665

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