Beyond Customer Lifetime Valuation: Measuring the Value of Acquisition and Retention for Subscription Services

Abstract

Understanding the value of acquiring or retaining subscribers is crucial for subscription-based businesses. While customer lifetime value (LTV) is commonly used to do so, we demonstrate that LTV likely over-states the true value of acquisition or retention. We establish a methodology to estimate the monetary value of acquired or retained subscribers based on estimating both on and off-service LTV. To overcome the lack of data on off-service households, we use an approach based on Markov chains that recovers off-service LTV from minimal data on non-subscriber transitions. Furthermore, we demonstrate how the methodology can be used to (i) forecast aggregate subscriber numbers that respect both aggregate market constraints and account-level dynamics, (ii) estimate the impact of price changes on revenue and subscription growth and (iii) provide optimal policies, such as price discounting, that maximize expected lifetime revenue.