So you think you are in the membership business, huh? Well – I bet you didn’t know that you are really in the actuarial business! (Unless of course you are an association professional working for an actuarial society that is … ) And without knowing you or anything about your organization, I can guess that you are probably spending too little on customer recruitment in your member acquisition strategy.
Why would I say that? Because memberships are worth more than one year of dues. Many membership organizations cannot (or will not) look beyond that first dues payment to determine what a new member is worth and how much to spend recruiting them.
The consequence is that those organizations undervalue the lifetime value (LTV) of a member, underestimate the “allowable acquisition cost” and underinvest in new member recruiting. This leaves future revenue and, more importantly, future new members on the table.
KEEP IT SIMPLE
One of the biggest mistakes an organization makes when thinking about lifetime value is trying to capture every possible input to the value equation. You can always mature your value model – but the more you complicate it, the more your peers will argue with you on the legitimacy of all of those inputs.
Let’s start simple. We have a fictitious organization called the “Left-handed Bowlers League.” Anyone is welcome – but you have to be left-handed to vote!
LHBL has annual dues of $40. Our membership manager has a pretty good grasp on renewal data. She tells us that first-year members usually renew at a rate of about 50%. The second year members renew at 65%. And third year (and beyond) average about 79%. We now have all the data we need to make our first attempt at an LTV calculation.
Assume that LHBL currently recruits 1000 new bowlers each year. How can we determine the sum of all of the future dues revenue that will come from those members?
Break it down:
Year 1 – 1000 members = $40,000
But in year 2 we lose half of them (1000 * 50% renewal rate = 500).
Year 2 – 500 members = $20,000 (65% renewal rate: 500*65% = 325)
Year 3 – 325 members = $13,000 (79% renewal rate: 325*79% = 257)
Year 4 – 257 members = $10,280 (79% renewal rate: 257*79%= 203)
Year 5 – 203 members = $8,120
Obviously I could keep going for quite some time (25 years until we are down to 1 to be exact) – but remember KISS (Keep it Simple, Silly!). So let’s stop at 5.
What do we know?
Well – we collected $91,400 over 5 years. That means that those 1000 new members generated us an average of $91.40 and the average longevity of those 1000 new members was 2.4 years.
How did I get average longevity? Similar to the above dues illustration, you can calculate the longevity of each cohort – only in reverse. We will use the “lost” members from each cohort.
Year 1 – we lose 500 people.
1000 new members – 500 retained = 500 lost
1 yr * 500 lost members = 500 person-years
Year 2 – we lose 175 people.
500 members – 325 retained = 175 lost
2 yrs * 175 lost members = 350 person-years
Year 3 – we lose 68 people. 3 yrs * 68 = 204 person-years
Year 4 – we lose 54 people. 4 yrs * 54 = 216 person-years
Year 5 – we have 216 people. 5 yrs * 216 = 1080 person-years
Grand Total – 2350 person years. Divide by our original 1000 new members and round up gives us 2.4 years of average tenure per new member.
That is a good start for our LTV calculations.
It turns out that stopping at 5 years is a little too soon. More accurate results are $121.40 average dues with an average tenure of 3 years if we go all the way to 25 years. But still trying to keep it simple and conservative, right?
WHAT IS A MEMBER WORTH?
For every new member we recruit we will collect $91.40 on average. But I can hear it now. “Wait – what about convention revenue? What about workshop revenue? What about donation revenue?” Those are all good thoughts. As you mature your thinking, you can include revenue from other activities based on the average attendance, average revenue or average donation over time – again informed by our longevity calculation.
But for now – let’s stick with $91.40. That seems like a pretty healthy number. Certainly more than one or even two years of dues. Glad we took the time to do a rough calculation! That is what we have to work with to determine what we should spend to recruit that member.
HOW MUCH CAN I SPEND TO GET A NEW MEMBER?
Well – at first blush, maybe I say I can spend it all? If I don’t get that member, then I won’t get the $91.40.
Oops – that woke the Chief Financial Officer up! Here he comes, ready to tell you that you are going to bankrupt the association.
So we are somewhere between $0 and $91.40. But where?
What does it cost to fulfill that new member?
- Welcome Kit: $2.50
- Annual card fulfillment (after Year 1): $2.80 (based on 2.4 years, we only need to charge for 1.4 of our $2 renewal kits.)
- Every-other-month (6x) print newsletter or magazine: $25.20 ($1.75 per issue * 6 per year * 2.4 average longevity)
- Renewal mailings: $4.32 ($1.8 cost per renewed member * 2.4 average longevity – how did I get $1.80? That is an article for another day!)
Maybe your list is longer – but the key is to ONLY use costs that are purely variable like a magazine or newsletter. Then ONLY allocate the incremental cost. Meaning don’t load the magazine cost with all of the overhead costs like staff, writers, licensing … Just the cost of printing one more magazine or newsletter. (Paper, ink, postage, etc.)
OK! We have collected $91.40 and spent $34.82 in fulfillment. Can we spend the balance – $56.58 – to recruit? In theory yes – since you would be no worse off than if you hadn’t gotten them in the first place.
ON THE MARGIN
But our CFO probably won’t like that you are generating revenue with ZERO margin. Hard to cover overhead and other member programs that way. So to keep him happy, we will say we need 50-75% contribution margin on that net number.
Voila! $14.15 – $28.29
We now have an allowable acquisition cost range grounded in reasonable calculations (that hopefully will keep that CFO at bay.)
Congratulations – now you are an actuary.
As a rule of thumb, most organizations can afford to spend at least 50% of their 1-year dues rate in acquisition cost and many can push that to 100% of their first year dues. But you probably wouldn’t have believed this rule of thumb without the illustration and would have gasped at that “high cost.”
BE BOLD – GET MORE!
If you could consistently (and intelligently) spend that first year of dues on getting more members – via digital advertising, new member discounts, direct mail recruiting or any other trackable tactic – why wouldn’t you?
We just calculated that you can spend 36-73% of your first year dues while showing a 50-75% margin on that new net revenue (plus more members on the roster) and we did it with a highly conservative 5 year timeline. And we didn’t even include any other non-dues revenue. So why not?
The answer is a lack of boldness. Those who live and die by these principles – for example, insurance companies – understand that you have to spend money to get a stream of continuity revenue. Consider this – most auto insurance companies will spend MORE than a full year of your auto premium to get a new auto policy. That is A LOT of marketing dollars while still being profitable!
But membership organizations fall into the trap of believing that they would be wasting the membership’s money by spending a full year’s worth of dues to recruit a new member. Or perhaps the CFO has too strong of a hand and a “cost-cutting background” when budgets are set.
Experience says that successful membership and continuity organizations have embraced this principal with robust member recruiting budgets. And organizations that minimize or are constantly cutting their membership marketing budget find themselves on the treadmill of dwindling new members. Member attrition starts eating into their member number and ultimately they see an overall decline in the organization size.
We have all heard it a thousand times, but it is so true in the membership/continuity business. “You gotta spend money to make money” (and get members!)
You need to invest in your membership recruiting if you want to grow the organization. Organizations grow from getting new members – not chasing the impossible 100% renewal rate.
Be bold! Get off that treadmill and invest in getting new members! (Oh – and good luck on that conversation with the CFO.)