Customer Lifetime Value Student Guide & Assignment

OVERVIEW

The Customer Lifetime Value Assignment deals with entertainment streaming service Netflix.

Learning Objectives

Gain experience calculating customer lifetime value $($CLV$)$

Gain experience calculating cost per customer acquisition

Consider optimization of the marketing mix based on CLV and cost per customer acquisition

INSTRUCTIONS

Consult the "Customer Lifetime Value Student Guide" below before completing the assignment below.

Customer Lifetime Value Student Guide

Customer Lifetime Value Student Guide

BACKGROUND

Netflix has become an online video streaming platform categorized by high loyalty for its original content such as "Stranger Things" and "The Great British Baking Show."

In $2000,$ Netflix was a movie rental service that delivered DVDs by mail. In $2007,$ the company began online streaming in the United States and in $2013$ offered its first original content. In $2016$ Netflix was available in $190$ countries. Recent focus has been on increasing the number of subscribers outside of the U$.$S$.$

Netflix has certainly had success in the entertainment streaming industry, an industry that includes a number of competitors hoping to succeed in the streaming market, including Amazon, Hulu, Disney, HBO, and NBC$.$

METRICS

Although Netflix obtains paying subscribers through unique deals like bundles and discounts, these are the numbers you should use to calculate your metrics in this assignment:

$$\frac{12\mathrm{.}99}{?}$ month for a paid subscription $*12=$$$155\mathrm{.}88$ annual revenue

Cost to acquire and maintain each subscriber $=$$$99$ annually

Annual Retention rate $=90\%$

Annual Discount rate $=10\%$

GETTING STARTED

Customer lifetime value $($CLV$)$ informs companies about how much a customer is worth to them. It's especially important for companies like Netflix, where they want customers to continue to subscribe to services. These metrics focus on the LONG TERM value a single customer brings to the company.

You can calculate the Customer Lifetime Value using this formula:

$CLV=($ Average Profits per Customer per Period$)\frac{(Retention\text{R}\text{a}\text{t}\text{e})}{1+(\text{D}\text{i}\text{s}\text{c}\text{o}\text{u}\text{n}\text{t}\text{R}\text{a}\text{t}\text{e})-(\text{R}\text{e}\text{t}\text{e}\text{n}\text{t}\text{i}\text{o}\text{n}\text{R}\text{a}\text{t}\text{e})}$

Retention rate $=$ percentage of customers who remain loyal over time

Discount rate $=$ cost of capital for the organization

CHANNEL METRICS

Netflix uses pay$-$per$-$click $($PPC$),$ social media advertising, original content creation, email marketing, and PR & event channels to acquire customers. Use these metrics as assumptions for Netflix's ad spend per channel:

PPC: $$60m$

Social Ads: $$175m$

Original content creation: $$300m$

Email marketing: $$50m$

PR & Events: $$75m$

And assume these are the total conversions per channel:

PPC: $500k$

Social Media Ads: $2\mathrm{.}3m$

Original content creation: $2\mathrm{.}8m$

Email marketing: $300k$

PR & Events: $200k$

The formula to calculate cost per acquisition:

CPA$=\frac{\text{T}\text{o}\text{t}\text{a}\text{l}Ad\text{S}\text{p}\text{e}\text{n}\text{d}}{\text{T}\text{o}\text{t}\text{a}\text{l}\text{a}\text{t}\text{t}\text{r}\text{i}\text{b}\text{u}\text{t}\text{e}\text{d}\text{C}\text{o}\text{n}\text{v}\text{e}\text{r}\text{s}\text{i}\text{o}\text{n}\text{s}}$

Customer Lifetime Value Assignment

INSTRUCTIONS

Provide answers to the following prompts based on the information provided in the "Customer Lifetime Value Student Guide."

Calculate the CLV for Netflix. Show your work.

Calculate the CPA of all given channels.

a$)$ PPC CPA

b$)$ Social Media Ads CPA

c$)$ Original content creation CPA

d$)$ Email marketing CPA

e$)$ PR & Events CPA

$3.$ Optimize the budget allocation between channels. Considering the calculated data from prompts $1$ and $2,$ make recommendations for future budget allocation. Allocate your marketing budget to maximize the amount of conversions. Assume that you have the same total budget $($$$660m)$ and no one channel can receive more than $$300m$ in budget. List your budget allocations in bullets or a chart.