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). Answer:

Explanation / Answer

We can use the simple formula since the margin and retention are constant:

Subscriber Lifetime Value = Margin * [ Retention Rate / [1 + discount rate - retention rate]]

= 24 * [28% / [ 1+ 9% - 28%]] = 8.30

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