HOW TO CALCULATE LIFETIME VALUE OF A MEMBER

What is the value of a member to your Club?

If you don’t know the answer to this question, you may be surprised to learn just how important each and every member is to your Club’s overall financial health.

As an agency that works with private clubs to develop and implement membership marketing strategy, we use Lifetime Value of a Member (LVM) to guide membership marketing return on investment.  You can get pretty scientific in how you calculate this metric, but for most, the key is to consider bottom line impact – not just the impact on revenue.

By knowing this critical metric, it can not only help guide membership recruitment and estimate marketing costs, but it can also guide retention.  

For any business, one of the most effective ways to boost lifetime value is to increase customer satisfaction. Research has found that a 5% increase in customer retention can increase profits by 25% to 95%. The same study found that it costs six to seven times more to gain a new customer than to keep an existing one.

Here’s a basic formula that you can use to calculate LVM:

Step 1: Average Your Variables

a) Calculate the Average Membership Tenure (in years):  Take the number of members that have resigned in the past 12 months, divided by the number of members that you started with to determine the annual attrition rate.  Then, take 1 divided by the annual attrition rate to arrive at the average membership tenure in years.

Average Membership Tenure (in Years) = 1 ÷ (Number of Resignations Last Year ÷ Number of Members at the Start of Last Year) =

b) Calculate the Average Initiation Fee Revenue:  This is simply the total initiation fees collected for the year divided by the number of new members added for the same period.

Average Initiation Fee = Initiation Fees Collected ÷ Number of New Members

c)   Calculate the Average Annual Dues Revenue: Take the total annual dues revenue and divide by the average number of members for the year.

Average Annual Dues = Annual Dues Revenue ÷ Average Number of Members

d) Calculate the Average Net Member Spending: Take the gross member-related food and beverage revenues and divide by the Average Number of Members to arrive at gross spending per member.  Be sure to include any unspent minimum revenue if that is relevant for your Club.  Then, take that amount and multiply by your F&B profit margin to arrive at the net F&B per member.  If applicable, repeat this formula for other member-related profit centers, including Pro Shop Merchandise, etc.

Average Net Member Spending = (Annual Member Revenues ÷ Average Number of Members) x Profit Margin

e) Calculate the Average Overhead Cost: Add all direct operating expenses (including payroll) excluding any capital items or costs that are included in the profit margins in step 4 above. Typically included are expenses related to G&A, Clubhouse, Golf Course, Membership, etc. Be sure to exclude any direct costs for non-member related banquets.  Then divide this amount by the average number of members.

Average Overhead per Member = Direct Operating Expenses ÷ Average Number of Members

Step 2: Calculate Lifetime Value of a Member

In this final step, you simply combine the results from the calculations above to arrive at the annual value of a member, then multiply that amount by the Average Membership Tenure to determine lifetime value.

LVM = (Average Initiation Fee Revenue + Average Annual Dues + Average Net Member Spending – Average Overhead per Member) x Average Membership Tenure

Calculating LVM can help you see how profitable members are—and how much should be spent on acquiring them (or keeping them). Knowing lifetime value also lets you see how, or if, you can discount pricing, and can help you find innovative ways to build value upfront and create offers that drive enough volume to support and eventually increase your overall lifetime value.

---