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If we know that the formula is
CLT = [$M-$R] x [(1+d)]/[(1+d-r)]
Where:
– M – Contribution per period from active customers. Contribution = sales price – variablecosts
– R – Retention spending per period per active customer
– r – Retention rate (fraction of current customers retained each period)
– d – Discount rate per periodWe know that HBO charges about $19.95 per month. Variable costs are about $1.50 per account per month. Marketing spending is about $6 per year. Their attrition is only about .5 per month. We knew that they have low attrition, or good retention rate at a monthly discount rate of one percent. What is the customer lifetime value?Let’s consider a scenario. If HBO reduces marketing retention spending by half, they expect attrition will go up by one percent. So, they’re reducing their spending, so they’re going to get higher attrition rates because retention rate is going to go down. Should they do it?
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