In November 2019, Disney launched its new streaming service Disney+ for \$6.99 per month or \$69.99 per year. By April 2020, it had attracted 50 million global subscribers, many of whom were fans of Disney and perhaps did not need any advertising to sign up. These customers would generate revenue over several months or years, so we need to consider future revenue.

Assume that after the initial burst of subscribers, Disney ran several ad campaigns to acquire new subscribers. Using an approach similar to the one we described for Away luggage, Disney estimates its customer acquisition costs (CAC) as \$200 and average annual revenue of \$60, net of discounts and promotional offers. These customers would provide recurring revenue but not all of them would stay with the company in the future. In other words, the retention rate for Disney+ will be less than 100%. Let’s assume that based on its own data as well as data from Hulu and ESPN+, Disney estimates its annual retention rate to be 80%.

Is it profitable to acquire customers at a CAC of \$200?

## Assumptions

To address this question, we need to estimate customer lifetime value or CLV. One simple way to estimate CLV is:

CLV = m * T

Where m is a customer’s annual contribution margin, and T is the expected life (in years) of a customer with the firm. Customer’s expected lifetime can be estimated as:

T = 1 / (1 – r) = 1 / Churn Rate

Where r is the annual retention rate, and (1-r) is the annual churn rate. For Disney, an 80% retention rate or 20% churn rate implies the expected life of a customer as 5 years. Since the marginal cost of an additional customer for digital service is close to zero, the annual margin per customer is equal to the average annual revenue of \$60.

What is the CLV for Disney+?

While this analysis is simple, it ignores the time value of future profits. Strictly speaking, CLV is the present value of all future stream of profits from a customer, considering the possibility that a customer may leave the firm in the future. We can use a spreadsheet to calculate CLV, or if we assume constant margin (m) and constant retention rate (r), then CLV can be written as:

CLV = m + m * r / (1 + r) + m * r^2 / (1 + i)^2 + …

This formulation assumes the following:

• Customer pays at the time of acquisition (e.g., at the time of signing up for Disney+), which generates margin “m” for the company,
• At the end of year 1, “r” percent (e.g., 80%) of customers stay with the firm and we get a margin “m” which is discounted at the discount rate “i” to get the present value of future profits.
• At the end of year 2, r2 customers stay with the firm, and so on.

At the end of year 3, what percentage of customers stay with Disney+?

The preceding equation is a geometric series that can be rewritten as:

CLV = m(1 + i) / (1 + i – r)