Question

ASSIGNMENT Customer Lifetime Value

STEP 1: CONSIDER RELEVANT NUMBERS Netflix obtains paying subscribers through unique deals like bundles and discount. Here are numbers to use in order to calculate metrics for this assignment: ● Customers pay $12.99/month for a subscription ● The average subscription length is 25 months. Customer lifetime revenue = ($12.99 X 25 = $324.75) ● Cost to acquire and maintain each subscriber = $99 ● Annual Retention rate = 60 percent ● Annual Discount rate = 10 percent

STEP 2: FIGURE CUSTOMER LIFETIME VALUE Customer Lifetime Value (CLV) informs companies about how much a customer is worth to them. CLV is especially important for companies like Netflix that want customers to continue to subscription services. CLV metrics focus on the LONG TERM value a single customer brings to the company. You can calculate CLV using this formula: CLV = Margin Retention Rate 1 + Discount Rate − Retention Rate Margin: customer lifetime revenue – cost it takes to acquire and maintain each customer Retention rate: percentage of customers who remain loyal over time Discount rate: cost of capital for the organization 1. What is the CLV for Netflix? Show your work. Answer: _______________

STEP 3: FIGURE CUSTOMER ACQUISITION COSTS One way to increase Customer Lifetime Value (CLV) is to decrease Cost Per Acquisition (CPA), that is the cost to acquire a new customer (subscriber). Netflix uses pay-per-click (PPC), social media advertising, original content creation, public relations and event channels, and email marketing to acquire customers. Use these metrics as assumptions for Netflix’s spend per channel: ● PPC: $60m ● Social media ads: $175m ● Original content creation: $300m ● Public relations and events: $75m ● Email marketing: $50m And assume these numbers for total conversions per channel: ● PPC: 500,000 ● Social media ads: 2.3m ● Original content creation: 2.8m ● Public relations and events: 200,000 ● Email marketing: 300,000 The Formula You can calculate CPA using this formula: CPA = Total Ad Spend Total Attributed Conversions Calculate the CPA of all given channels.

1. PPC CPA: _______________

2. Social Media Ads CPA: _______________

3. Original content creation CPA: _______________

4. Public relations and events CPA: _______________

5. Email marketing CPA: _______________

STEP 4: OPTIMIZE THE MARKETING MIX With this data, make a recommendation for a marketing mix. Allocate a marketing budget and content creation budget to optimize the spending among marketing channels. Make sure to include evidence from the data found while figuring out the CLV and CPA. The total budget for the marketing mix is $660m, and there is a cap for spending more than $400m on one channel.

1. Make recommendations for the marketing mix: ____________________________________________________________________________

STEP 5: LOOKING FORWARD Disney’s new streaming service called Disney+ saw 15 million subscribers in its first month. The success on social media advertising for Disney+ has led to a dip on social media for Netflix. To consider ● Disney+ is priced at $6.99/month, or $69.99/year — significantly cheaper than Netflix. Disney+ customers can bundle Hulu and ESPN+. ● Disney+ is available in 5 countries: United States of America, Canada, the Netherlands, New Zealand, and Australia, compared to Netflix’s almost global reach. ● It is anticipated that Disney+ will be in all major markets by the end of 2021 In groups, discuss how, considering the availability of Disney+ and other streaming services, Netflix’s strategy should change moving forward. Discuss the following questions:

1. Over time, will Netflix customers move to different streaming providers? Explain your answer. ____________________________________________________________________________

2. What can Netflix do to keep current customers happy and gain new subscribers? ____________________________________________________________________________

Answer 1

Q1.	What is the CLV for Netflix? Show your working.
Ans.
	Revenue per customer per month	12.99	$
	Average subscription length per customer	25	months
	Lifetime revenue per customer =
	25 * 12.99	324.75	$
	Acquistion and maintenance cost per subscriber	99	$
	Profit margin per customer =
	324.75 - 99	225.75
	Annual retention rate	60	%
	Hence margin retention rate =
	225.75 * 60%	135.45
	Annual discount rate	10%
	Present value of margin retention rate =
	135.45/(1+0.10)^25/12	111.06	$
	Hence CLV (Customer Lifetime Value)
	for Netflix is $111.06
Q2.	Calculate CPA for all given channels
Ans.	Channel	Total Spend per channel in $	Total conversions per channel	CPA of each channel in $
	Pay-per-click (PPC)	6,00,00,000	5,00,000	120.00
	Social media ads	17,50,00,000	23,00,000	76.09
	Original content creation	30,00,00,000	28,00,000	107.14
	Public relations and events	7,50,00,000	2,00,000	375.00
	Email marketing	5,00,00,000	3,00,000	166.67
Q3.	Make recommendations for the marketing mix
Ans.	Considering that the CPA for the channels "Public relations and events" and
	"Email marketing" is very high and conversions are very low, Netflix
	should not make use of these channels for advertising its services.
	Maximum marketing amount should be allocated to the channels
	"Social media ads" and "Original content creation"
	The budget allocation should be $400m to "Social media ads", $200m to "Original
	content creation" and $60m to "Pay-per-click" channel.
Q4.	Over time, will Netflix customers move to different streaming providers?
	Explain your answer.
Ans.	Considering the fact that Disney+ is charging just 50% of what Netflix
	is charging i.e. $6.99/month compared to $12.99/month, there is a
	very high probability of customers switching over to Disney+ in the future
	when it obtains a global reach.
	Also Disney+ is offering Hulu and ESPN+ as bundled services which is
	an additional incentive to attract customers which may further lead to loss
	of customers for Netflix.
Q5.	What can Netflix do to keep current customers happy and gain new
	subscribers?
Ans.	In the current competitive scenario, to keep customers happy and
	gain new subscribers, Netflix may have to do the following :
	- Reduce its price per month
	- Reduce its cost per acquisition by concentrating on one or two
	advertising channels instead of the present five channels
	- Provide some bundled services alongwith the normal services
	- Improve the quality of its existing services