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

Question

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 $24 per year. The average yearly retention rate is 28%. The CFO of the company believes that the annual discount rate is 9%. 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).

Explanation / Answer

Assumptions : * Year 1 total subscriblers are 1million and every year new subscriber will add by 1million Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Total A New Subsriber            1,000,000            1,000,000            1,000,000            1,000,000            1,000,000            1,000,000            1,000,000            1,000,000            1,000,000            1,000,000 B Retention @ 28%                280,000                358,400                380,352                386,499                388,220                388,701                388,836                388,874                388,885 C Total Subscribers            1,000,000            1,280,000            1,358,400            1,380,352            1,386,499            1,388,220            1,388,701            1,388,836            1,388,874            1,388,885 D Average Contribution per customer                           24                           24                           24                           24                           24                           24                           24                           24                           24                           24 E Total Contribution (C *D)          24,000,000          30,720,000          32,601,600          33,128,448          33,275,965          33,317,270          33,328,836          33,332,074          33,332,981          33,333,235 F Present Value @ 9% 0.9174 0.842 0.772 0.708 0.650 0.596 0.547 0.502 0.460 0.422 G Present Value of Contribution          22,018,349          25,856,409          25,174,417          23,469,028          21,627,094          19,866,000          18,232,014          16,728,244          15,347,430          14,080,319    202,399,304

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