Economics Of Membership Developing Metrics Final

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A complete and clear presentation on the metrics membership marketers need to monitor. If you\'d like to learn more, call Erik Schonher, Vice President, MGI, at 703.706.0358

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Economics Of Membership Developing Metrics Final

  1. 1. The Economics of Membership Presented by Erik Schonher Sr. Director
  2. 2. Free Book Offer! 6 Lucky CESSE Members
  3. 3. Our Plan for Today <ul><li>Context: Why learn this stuff? </li></ul><ul><li>What you will learn from this session: Key Membership Calculations </li></ul><ul><li>Application to your Association </li></ul><ul><li>Group Practice </li></ul>
  4. 4. Why Learn This Stuff? <ul><li>Membership is usually UNDERFUNDED. </li></ul><ul><li>Numbers are a common language </li></ul><ul><li>These calculations are numerical descriptors of key, strategic, membership variables. </li></ul><ul><li>These calculations will help you support membership to your Executive Director and your Board. </li></ul>
  5. 5. Membership Dashboard
  6. 7. Key Membership Calculations <ul><li>Response Rate </li></ul><ul><li>Cost to Obtain a Member </li></ul><ul><li>Renewal Rate </li></ul><ul><li>Average Tenure </li></ul><ul><li>Lifetime Value </li></ul><ul><li>Maximum Acquisition Cost </li></ul><ul><li>Steady State Analysis </li></ul>
  7. 8. Response Rate <ul><li>Response rate measures the number of prospects who responded to a marketing effort. </li></ul>
  8. 9. Response Rate <ul><ul><li>Total number of responses / Total number of prospects contacted X 100. </li></ul></ul><ul><ul><li>Mailing: 50000 </li></ul></ul><ul><ul><li>Response: 250 </li></ul></ul><ul><ul><li>Example: (250/ 50,000) x 100 = .50% </li></ul></ul>
  9. 10. Cost to Obtain a Member <ul><li>The cost to obtain a member can be viewed as: </li></ul><ul><li>Individual Cost: the additional cost for each new individual member; or, </li></ul><ul><li>(Running) Average Cost: the cost impact of each additional new member over all new members. </li></ul>
  10. 11. Cost to Obtain a Member <ul><li>Individual </li></ul><ul><li>$10.00 </li></ul><ul><li>$20.00 </li></ul><ul><li>$30.00 </li></ul><ul><li>$40.00 </li></ul><ul><li>$60.00 </li></ul><ul><li>$90.00 </li></ul><ul><li>(Running) Average </li></ul><ul><li>$10.00 </li></ul><ul><li>$15.00 </li></ul><ul><li>$20.00 </li></ul><ul><li>$25.00 </li></ul><ul><li>$32.00 </li></ul><ul><li>$41.66 </li></ul>
  11. 12. Cost to Obtain a Member <ul><li>Individual: Applying direct costs by channel/effort to each member obtained. DM vs. White Mail vs. Web vs. E-mail </li></ul><ul><li>Average: Applying costs over the entire acquisition program. Cost of all programs vs. Total new members </li></ul>
  12. 13. Renewal Rate <ul><li>VERY IMPORTANT </li></ul><ul><li>Fundamental Benchmarking Tool </li></ul><ul><li>“Foundational” as it forms the basis for all other calculations </li></ul>
  13. 14. Renewal Rate <ul><li>Renewal Rate measures the number of members kept over a given period of time -- usually during a fiscal or calendar year. To determine how many: </li></ul><ul><ul><li>Total Number of Members Today (minus 12 month new members) / Total Number of Members in Previous Year </li></ul></ul><ul><ul><li>Example: (105 -15)/100 = 90% </li></ul></ul><ul><ul><li>Renewal Rate = 90% </li></ul></ul>
  14. 15. Average Tenure <ul><li>Each member is an ‘annuity’ that provides, with an initial investment, an on-going revenue stream. </li></ul><ul><li>Key – How long will they stay? </li></ul><ul><li>“Big-Picture” </li></ul>
  15. 16. Average Tenure <ul><li>Defines how long on average do members stay with an association. </li></ul><ul><ul><li>Renewal Rate is 90% or .90 </li></ul></ul><ul><ul><li>Reciprocal of Renewal Rate = .10 </li></ul></ul><ul><ul><li>Divide Reciprocal into = 1 /.10 </li></ul></ul><ul><ul><li>Example: 1/ .10 = 10 </li></ul></ul><ul><ul><li>Average Tenure = 10 Years </li></ul></ul>
  16. 17. Lifetime Value (LTV) <ul><li>As marketers, we want to know what that ‘annuity’ is worth. </li></ul><ul><li>On average, over the next 10 years, what can we expect in revenue from each new member? </li></ul>
  17. 18. Lifetime Value (LTV) <ul><li>Defines the economic value produced by a typical member. </li></ul><ul><ul><li>Average Tenure = 10 Years </li></ul></ul><ul><ul><li>Assume $100 / Year Dues and $50 / Year in Non-Dues Revenue </li></ul></ul><ul><ul><li>($100 + $50) * Average Tenure = LTV </li></ul></ul><ul><ul><li>($100 + $50) * 10 = $1,500 </li></ul></ul><ul><ul><li>Lifetime Value = $1,500 </li></ul></ul>
  18. 19. Maximum Acquisition Cost (MAC) <ul><li>While we have an average membership life and an estimated revenue for the average membership life, we have not considered incremental servicing costs and costs-of-goods-sold . </li></ul><ul><li>Essential to estimate how much profit you want to make per member and to calculate how much you want to spend to acquire a new member. </li></ul>
  19. 20. Maximum Acquisition Cost (MAC) <ul><li>Defines the theoretical maximum investment that can be made to acquire a member or customer at a profit. </li></ul><ul><ul><li>Average Tenure = 10 Years </li></ul></ul><ul><ul><li>Annual Revenue </li></ul></ul><ul><ul><ul><li>Dues = $100 </li></ul></ul></ul><ul><ul><ul><li>Non-Dues = $50 </li></ul></ul></ul><ul><ul><li>Assume Incremental Servicing Costs = $20 and Cost of Goods Sold = $25 </li></ul></ul><ul><ul><li>(($100 + $50) - ($20 + $25)) * 10 = MAC </li></ul></ul><ul><ul><li>(($100 + $50) - ($20 + $25)) * 10 = $1,050 </li></ul></ul><ul><ul><li>Maximum Acquisition Cost = $1,050 </li></ul></ul>
  20. 21. So What? <ul><li>All of these calculations are only useful if you know where you are going. </li></ul><ul><li>Given your annual renewal rate and the annual number of new members acquired, if you did not change in your renewal and acquisition strategies, how large or small would your association become? </li></ul>
  21. 22. This is “So What.” <ul><li>Knowing this ‘Steady State’ helps you figure out how to apply the other formulas and answer strategic questions: </li></ul><ul><ul><ul><ul><ul><li>Increase renewal rates? </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Increase acquisition? </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Leave it alone? </li></ul></ul></ul></ul></ul>
  22. 23. Steady State Analysis (New Member and Renewal) <ul><li>Defines the equilibrium of total membership where members gained will equal members lost. </li></ul><ul><li>Annual New Member Input / Lapse Rate = Steady State Membership </li></ul><ul><ul><li>Example: Lapse Rate of 20% and 1000 New Members </li></ul></ul><ul><ul><ul><ul><ul><li>(1,000 / .20) = 5,000 </li></ul></ul></ul></ul></ul><ul><ul><li>90% Renewal Rate and 1000 New Members: </li></ul></ul><ul><ul><ul><ul><ul><li>(1,000 / .10) = 10,000 </li></ul></ul></ul></ul></ul><ul><ul><li>60% Renewal Rate and 1000 New Members: </li></ul></ul><ul><ul><ul><ul><ul><li>(1,000 / .40) = 2,500 </li></ul></ul></ul></ul></ul><ul><ul><li>90% Renewal Rate and 200 New Members: </li></ul></ul><ul><ul><ul><ul><ul><li>(200 / .10) = 2,000 </li></ul></ul></ul></ul></ul>
  23. 24. Steady State Exercise: What’s the best strategy? <ul><li>Focus on acquisition by prioritizing the membership-marketing budget to maintain the current 75% renewal rate and add 8,000 new members each year. </li></ul><ul><li>Focus on renewals by prioritizing the membership-marketing budget to achieve an 85% renewal rate and maintain the current level of 2,000 new members who join during the year. </li></ul><ul><li>Focus on a balanced approach by prioritizing the membership-marketing budget to achieve an 80% renewal rate and adding 5,000 new members each year. </li></ul>
  24. 25. Strategy Impacts Outcomes <ul><li>The first option with a 75% renewal rate and 8,000 new members per year will achieve a total membership of 32,000 members over time (8000/.25 = 32,000) </li></ul><ul><li>The second option with an 85% renewal rate and 2,000 new members per year will achieve a total membership of 13,333 members over time (2,000/.15 = 13,333). </li></ul><ul><li>The third option with an 80% renewal rate with 5,000 new members per year will achieve a total membership of 25,000 members over time (5,000/.20 = 25,000). </li></ul>
  25. 26. Case Study <ul><li>Practical Application </li></ul>
  26. 27. Case Study <ul><li>The ABC Association last year had 100,000 members. This year 15,000 new members were added to the association. 10,400 of these new members were attributed to direct mail campaigns of 800,000 pieces. Membership acquisition mailings cost $750 per thousand pieces mailed. The membership now stands at 105,000. Membership dues are $75 a year. The average non-dues revenue is $50 a year per member. Incremental servicing costs average $15 per member. On average, the cost of goods sold is 25 percent of the sales price. </li></ul>
  27. 28. What are the key economics for your association? <ul><li>Response Rate </li></ul><ul><li>Cost to Obtain a Member </li></ul><ul><li>Renewal Rate </li></ul><ul><li>Average Tenure </li></ul><ul><li>Lifetime Value </li></ul><ul><li>Maximum Acquisition Cost </li></ul><ul><li>Steady State Analysis </li></ul>
  28. 29. Numbers <ul><li>Please determine the following for ABC Association: </li></ul><ul><ul><li>Acquisition Response Rate </li></ul></ul><ul><ul><li>Association’s Renewal Rate </li></ul></ul><ul><ul><li>Cost to obtain a member </li></ul></ul><ul><ul><li>“ Lifetime Value” of a Member </li></ul></ul><ul><ul><li>“ Maximum Acquisition Cost” </li></ul></ul><ul><ul><li>“ Steady State” Membership of ABC Association </li></ul></ul>
  29. 30. Answers <ul><ul><li>Acquisition Response Rate 1.3% </li></ul></ul><ul><ul><li>Association’s Renewal Rate 90% </li></ul></ul><ul><ul><li>Cost to obtain a member $40 </li></ul></ul><ul><ul><li>“ Lifetime Value” of a Member $1,250 </li></ul></ul><ul><ul><li>“ Maximum Acquisition Cost” $975 </li></ul></ul><ul><ul><li>“ Steady State” Membership 150,000 </li></ul></ul>
  30. 31. Discussion <ul><li>Based on the member economics, what would you recommend as a strategy going forward for this organization? Some possible recommendations are: </li></ul><ul><ul><li>Move monies from acquisition to retention? </li></ul></ul><ul><ul><li>Increase member acquisition? </li></ul></ul><ul><ul><li>Stay the course. Don’t change anything. </li></ul></ul>
  31. 32. Questions? <ul><li>Most important questions are: </li></ul><ul><ul><li>Can these formulas help me refine my membership marketing strategy? </li></ul></ul><ul><ul><li>If “Yes,” with the reports I have, do I know my acquisition rate, renewal rate, dues revenue and non-dues revenue? </li></ul></ul>
  32. 33. Recommendation <ul><li>Create a Membership Dashboard to help you keep track of these key, strategic, variables. </li></ul>
  33. 34. Questions <ul><li>Erik Schonher </li></ul><ul><li>Sr. Director </li></ul><ul><li>Marketing General, Inc. </li></ul><ul><li>[email_address] </li></ul><ul><li>703-706-0358 </li></ul>
  34. 35. LTV Analysis -- Special Considerations <ul><ul><ul><li>Lifetime/Tenure Calculations </li></ul></ul></ul><ul><ul><ul><ul><li>Year-by-Year </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Tenure Times Average Transaction Value </li></ul></ul></ul></ul><ul><ul><ul><li>Revenue Estimates </li></ul></ul></ul><ul><ul><ul><ul><li>Membership </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Non-Dues </li></ul></ul></ul></ul><ul><ul><ul><li>Cashflow </li></ul></ul></ul><ul><ul><ul><ul><li>Constant Dollars </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Discounted Dollars </li></ul></ul></ul></ul>

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