For everyone working in membership teams, it is likely you will have spent time discussing the value of your membership offering, and by extension, the lifetime value of your members.
As you probably already know, it is significantly more expensive to acquire a new customer than to keep an existing one, with the Harvard Business Review estimating it can cost anywhere from 5 to 25 times more, dependent on your industry.
Indeed, research done by the inventor of the Net Promoter Score (NPS) shows that increasing customer retention rates by 5% increases profits by 25% to 95%, that’s a potentially huge difference to your bottom line!
Whilst there will always be exceptions that prove this rule, generally, it is safe to assume that fewer resources are required to retain a customer so for those organisations with tight budgets, it makes sense to focus on retention.
Working out the lifetime value of your members
For a membership organisation, the formula below is the simplest way to work out a customer’s lifetime value (CLV)
CLV = (Average Revenue Per Account × Gross Margin %) ÷ Revenue Churn Rate
Once you know the customer lifetime value and your customer acquisition cost (how much it costs to sign them up), you are able to work out the health of your customer relationship and identify which segments may need a little extra attention or TLC.
For example, Audible used to spend an average of £70 on getting customers to sign up for a free trial as they know that the average lifetime value of each customer was much higher.
Sadly, we don’t all have Amazon’s budget, but it is possible to work out which tactics are paying off, for which membership segments, for your membership organisation.
Why you should care about customer lifetime value
Knowing your customer lifetime value means you can answer the key questions that really matter such as:
How do you benchmark against other organisations for lifetime value? Which helps you understand whether you are offering value for money, and if your retention comms are working too.
How much can our membership organisation afford to spend on acquisition without affecting our bottom line?
Which of our customer segments are most valuable to us as an organisation?
Are your retention efforts paying off or do you need to rethink them?
Are you wasting time, money or effort that could be better used elsewhere?
By being able to differentiate between lifetime supporters and one-time buyers, you can identify opportunities and invest in retention before they churn, thus keeping them on as a member.
By looking at your best performing segments, you can identify commonalities and lookalike audiences who share characteristics with your highest CLV.
Increasing your customer lifetime value
The easiest ways to boost your customer lifetime value (CLV) is to increase their average order value and to focus on your retention rate too. Whilst some price increases are inevitably needed for membership organisations, you should try to avoid the frequency being too high as this is likely to lead to a high churn rate.
Instead, can your organisation introduce tiered membership or upsell certain add-ons such as exclusive experiences or offers?
There are usually several quick wins that you can implement to scoop up any low-hanging fruit.
