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A member's lifetime value.

A Member's Lifetime Value

Seeing member acquisition as an investment in your organization's future.

Everyone in the membership marketing business is talking about the lifetime value of a member: how knowing a member's value can revolutionize the way we look at the marketing process. What is this magical concept that will open up new vistas for membership marketers? Actually, direct marketers have been using lifetime value for years. It helps them determine what products to offer customers, how many times to mail to them, and how much to spend to acquire the customer in the first place.

Associations calculate the lifetime value of a member as the average number of years members remain active, times the annual net revenue attributed to members--less all costs to acquire, renew, and service them. The result, divided by the number of active members, is the average lifetime value of each member.

Lifetime value can guide you

Determining lifetime value is not a onetime proposition. You are setting a benchmark of your present situation against which you can evaluate your progress in increasing the lifetime value of your members over time.

The three major association activities affected by understanding and using the lifetime value calculation are member acquisition, member retention, and member benefits and services.

Associations use a variety of ways to determine what they want to spend each year on obtaining new members. Generally, the membership marketing group puts together a promotion budget that it says will generate X number of new members. When the budget goes to the board for approval, discussion may concern whether the association can afford to spend this much to get new members. The board makes its decision on the basis that the activity represents an expense. The lifetime value concept changes the budget line item for membership acquisition from a cost to an investment. Costs and revenue associated with membership development remain in the membership portion of the budget; however, membership may then become a portion of the overall marketing budget.

The longer a member belongs to an organization, the more dues income will be produced, and the more opportunity the member has to participate in revenue-producing programs. Renewing a member seldom costs as much as obtaining a new one, so increasing lifetime value means keeping a member as long as possible. Knowing the long-term financial value of the member helps you determine how many times it will pay to ask for each renewal. More expensive renewal efforts like telemarketing, or even personal contact, may be very cost-effective when seen in terms of lifetime value.

Lifetime value also lets you better evaluate programs that have limited participation. If your member-needs research shows that some of your programs are very important to a specific segment of your membership, you may want to continue them even if they do not produce as much gross income as other programs. They may be contributing significantly to the retention and lifetime value of the segment that does use them. You can determine this from focus group or survey research, but remember to code any surveys to identify membership segments.

What you need to know

Before calculating lifetime value, here are some general considerations. First, your marketing group will need to work closely with your financial department because most of the data required will come from the membership data base and various financial reports.

Separate member acquisition costs from member retention expenses in your financial budgeting and reporting. Typical acquisition and retention costs include printing and postage on direct mail, telemarketing, advertising, incentive gifts, and so forth. These costs will be used separately in different parts of the lifetime value calculation.

Every department in the association must understand the concept of lifetime value because in the first year or two that an investment in new member acquisition is increased, the other departments may have to operate with restrained budgets. They need to see that the process can mean more funds for their activities in the long run.

The elements of calculating lifetime value are the average membership period and the costs and revenue associated with acquisition and retention. The average membership period is the length of time a member stays with your association. You can determine this easily if your membership data base contains the original affiliation date or tracks consecutive years of membership.

If you don't have this information, an acceptable initial value can be obtained from a statistical sample taken from membership records. The sample size should be sufficient to allow the result to be reasonably projected across the entire membership. Ten percent of total membership is a reliable sample for smaller associations. Associations with large numbers of members may want to use a slightly lower percentage.

Build revenue data

The second step in calculating lifetime value is determining the revenue and expenses required to attain a new member. Direct revenue from the new member during the first year includes dues and net income from the sale of products and services.

If income tracking doesn't distinguish new from longer-term members, estimate the total direct revenue that should be attributed to new members. You might try analyzing one association program as a model. See how its revenue breaks down between new and renewed members. Then use that calculation as a benchmark. Staff who take registrations and product orders can help you determine the amount and types of direct revenue contributed by new members.

Here are examples of direct revenue:

* dues; * contributions; * nondues revenue, such as sale of publications, seminar registration fees, convention registration fees, and credit card royalties; and * insurance royalties.

Indirect revenue is income that increases with your general membership number--for example, publications advertising and exhibit booth sales. Determining indirect revenue from new members is more speculative. You will need to assess the probability that your new members raise the total membership to a level that results in increased revenue from a particular activity. For example, if you increased membership to a specified level, would you be able to increase the advertising revenue for your publication or increase booth rental fees at your convention? If so, you may attribute the increase to new members.

Calculate expenses

Next, subtract expenses for new members to determine the net income--your return--from their first year. Expenses generally fall into two categories: marketing and member need fulfillment. Marketing costs include

* advertising agency and creative work; * printing; * mailing; * return postage; * telemarketing; * personal contact; * recruitment films or videos; * recruitment meetings; * recruitment materials to chapters; and * bonus gifts for joining.

Fulfillment costs include * processing of new memberships; * free publications; * free insurance; * membership kit, pins, decals, and certificates; and * salaries and related costs for member support staff (divide total cost by number of members and multiply by number of new members for new member portion).

After considering the items above, calculate the new member investment:




For example, say your new member goal is 40,000. You've estimated total revenue and total costs attributable to new members and found that each one costs $90 to acquire and brings in $60 the first year. Then, for 40,000 new members you can figure

$2,400,000 - $3,600,000 = $(1,200,000)

$1,200,000 / 40,000 = $30. Your acquisition investment will be $30 per member.

For member retention, compute the number of members who will renew by applying the current renewal rate to the total existing membership. Calculate direct and indirect revenue as for new members. Keep in mind that more indirect revenue is attributed to renewing members because it tends to come primarily from the existing membership base. Acquisition costs for renewals are generally much lower than for new members, but fulfillment costs could be higher. This will be true if member benefits increase with length of membership--for example, an insurance benefit that increases with each year of membership.

Again, use this calculation to determine renewal member return:




Say you anticipate 160,000 member renewals and find that each renewal brings in $100 and costs $80. Then, with 160,000 renewals

$16,000,000 - $12,800,000 = $3,200,000

$3,200,000 / 160,000 = $20. Your renewal member return will be $20 per member.

Find lifetime value

Having made these calculations, you now have the three pieces of information you need to complete the lifetime value calculation:

1. average length of membership

- 1 (the acquisition year)

= renewing years 2. x renewal member return

= total renewal member return 3. - membership acquisition investment

= lifetime value.

The chart gives an example of how the lifetime value was developed for a fictitious association. In this example, the association invested $41.66 in a new member for the first year to earn a net return over five years of $107.50. The payback period for the investment was only 2.1 years.

A case history

Let's look at how the lifetime value concept has helped the Aircraft Owners and Pilots Association, Frederick, Maryland. AOPA is an individual membership organization of pilots involved in general aviation--that is, everything but the airlines and the military.

In 1986 AOPA began to look at the idea of lifetime value because of negative forces in the marketplace, some of them not very different from those facing many associations in the 1990s.

The general aviation industry was declining. The cost of flying was rapidly increasing because of the high cost of aircraft and fuel. In addition, the deregulation of the airlines, and the resulting creation of congested airport hubs, meant flying in available airspace was more complex and required more expensive navigation and communication equipment.

This increasing cost and complexity was causing a decline in the pilot population, so AOPA found its market for new members shrinking. We had realized a 50 percent penetration of this declining market, reaching a high of 275,000 members, only to fall back to 255,000 by 1986.

Our policy up to this point had been to acquire new members at a rate and cost that provided positive cash flow for the association within the first year of membership. But the number of new members was declining rapidly: To get the required revenue, we'd have to increase dues for existing members. This was obviously a conflict, because the high cost of flying was the main reason members did not renew.

AOPA had two choices. One was to maximize net revenue in the next year by not spending heavily for recruitment. With minimum expenditure to gain new members, immediate net revenue is higher, but growth and long-term revenue is lower.

The alternative was to capitalize, even subsidize, membership acquisition that next year and pursue longer-term revenue. Spending more to increase the membership would allow AOPA to realize more rapid growth, but at the expense of immediate revenue.

The solution came through calculating lifetime value. By knowing how much net revenue the average member would produce during the time he or she remained active, AOPA was able to see the payoff of the initial investment of obtaining the new member. We could spend more than the first year's dues to recruit the member, knowing that over the membership life cycle this investment would return greater net revenue.

Since the average membership life cycle for AOPA is about seven years, the long-term profitability of investment in faster growth was clear. As a result, AOPA grew from 255,000 members in 1986 to more than 300,000 members at the end of 1989, and the financial condition of the association has never been stronger.

Even if your association is in a growth cycle and doesn't need to spend more to attract new members, it is a good practice to use the lifetime value concept. It gives you a method for tracking your membership development from year to year and allows you to forecast when you might need to increase dues. Remember to factor inflation into the expense projections for future years.

Understanding and applying the lifetime value concept to your association's marketing plan will guide you to the most appropriate strategy for membership growth and retention. It also helps you appreciate the value of keeping your members satisfied. Eventually you will be able to determine a lifetime value for each segment of your membership. Armed with this information, you will be positioned for the targeted marketing vital in the 1990s.

Harmon O. Pritchard, Jr., is senior vice president, membership, Aircraft Owners and Pilots Association, Frederick, Maryland.
COPYRIGHT 1991 American Society of Association Executives
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Title Annotation:includes related article; membership marketing
Author:Trout, Calvin
Publication:Association Management
Article Type:Cover Story
Date:Jun 1, 1991
Previous Article:Membership: the CEO's role.
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