Calculating the Cost to Serve a Member

One of the questions that I am frequently asked is how to calculate membership servicing costs.  It is an important question to building and sustaining a success membership marketing program.  But how you answer the question can have profound implications on your membership program.

Here is a real life story on how NOT to calculate the cost to serve a member.  One of my clients presented the following analysis to his staff.  He took the entire budget for his organization and divided it by the number of members and determined that the cost to service a member who annually paid $79 in dues was $300 ($3,000,000/10,000 members).

Shocked and with tongue in cheek, I told him that the best solution for the organization was to email all of the members and tell them not to renew – they would save $221 for each member who did not return.  Of course they would have to survive without the $800,000 in dues revenue and some portion of the non-dues, advertising, and exhibitor revenue dependent on members.

But in all seriousness, when an organization assigns too much cost to serving a member, the calculation can kill a membership program.  Why would an organization spend even the smallest amount of money on recruiting or renewing a member when the cost to serve approached the annual dues rate?

So what is the best way to determine the cost to serve a member?  I believe that the optimal method is to base the analysis on incremental servicing cost.

The incremental cost is simply made up of the variable costs that the association would incur to serve an estimated number of additional members.  These variable costs might be as simple as printing and mailing additional magazines and renewal notices.  You can determine these incremental costs by working with suppliers to get an estimate of what the additional cost would be if, for example, you printed and mailed and additional 1,000 magazines and sent out additional renewal notices to 1,000 more members and then divided these costs by that number of members.  A typical association might find these costs are less than $20 per member and not the $300 per member noted earlier.

Clearly over time for a rapidly growing association the incremental cost method poses some problems.  At some point, additional staff will be required to serve members and office space might need to be expanded.  But I have witnessed clients growing membership by 50 percent and not adding staff or additional space.

The other approach to calculating servicing costs is to try to define the “real” costs to serve a member.  The challenge is that what those real costs are is highly subjective.  Should the servicing costs include some portion of the CEO’s salary?  What about the editorial staff that works on publishing the magazine for members?  Should only the office space occupied by the membership department be assigned to the cost or the space used by others?  Are marketing communications sent to members a cost and if so does the membership revenue budget get credited with the non-dues purchases made by members?  How does the cost of insurance, software, and staff travel get assigned?

All these costs in theory can be assessed and monitored over time.  However, does this really provide a clearer picture or simply reflect someone’s arbitrary judgment call?

The bottom line is that for most associations, serving members is the reason that the organization exists.  And in addition to dues revenue, most product purchases, registrations, exhibit and advertising revenue are driven by the existence of members.  So understanding that there are costs to provide services to members needs to factor into any economic calculation, but following a simple incremental cost calculation will provide the fundamental information needed at a considerable savings of time and debate.


Dan said...

Tony, This is such a great topic to discuss. I've always wanted to do an in-depth study of the cost per member and I remember working through this with our budget analyst at ASCD wayback when as we tried to get a calculation of LTV.

I'm thinking you could try and define the costs of all of the elements of the membership by defining those elements and assigning a percentage to each. For instance, you could define the cost of the delivery of one journal by looking at printing, postage, returned mail fees, staff hours devoted to writing it, designing it, and even advertising, etc. Once the costs are totaled, then it can be divided by the number of members receiving the journal to define the cost for that element per issue then multiplying it by the number of issues they receive throughout their membershp cycle. Then you could move on to defining other elements.

You bring up a good point that this will still be fuzzy math when you figure in what members use or don't use over the course of their membership (i.e., did they use their member discount? how many renewal notices did it take for this member to renew vs. that member? etc.)

It would be powerful data to have on-hand when making decisions about the membership business model and discussions of organizational structure. Either way, membership drive organizations in many ways and regardless of the cost it's a business model that drives revenues higher.

Great post. Thanks for making me think (as usual).

Tony Rossell said...

Thanks Dan. I always appreciate your insights and comments. I agree with the comment that you may still end up with a "fuzzy" number with all of these more in-depth calculations.

Here is what I find. Typically, organizations are exploring the cost to serve a member in preparation of a budget for a recruitment effort. And that is why I like the incremental servicing cost approach because if you add new members, typically the cost to write, design, and staff a journal does not go up. These costs are fixed and will remain whether or not you add more members.

Jim Pealow said...

When determining the cost of serving a member it is important to distinguish between core services (i.e. voice activities, AGM, magazine) and related costs which all members are entitled to.

The other optional services (conferences, workshops, certifications, special reports, etc.) relate to pay as you use and if the service revenue covers all the costs then other services are not part of the cost of serving members. Pricing for these type of services should include direct and indirect costs.If the other optional services are not covered by enough revenue then they are subsidized and part of serving a member.