How NOT to Calculate the Cost to Serve a Member

A frequently asked question by membership professionals is how to calculate membership servicing costs. Accurately determining this is essential for building and sustaining a successful membership marketing program. However, how you answer the question can have profound implications.

Here is a real-life story on how NOT to calculate the cost of serving a member.

In a recent conversation with an executive at an individual membership association, he noted they could not obtain additional funding to support recruitment or renewals because leadership claimed the association “lost money on every member.” The organization’s annual dues are $175, but leadership calculated that it costs $217 to serve a member. The servicing cost was calculated by dividing most of the salaries and overhead by the number of members. Based on this economic philosophy, the membership manager received limited funding to support acquisition efforts.

I have engaged in this conversation with associations many times over the years. This budgetary perspective is severely flawed. If this analysis is correct, the association should ask all its members to leave to save money. Their calculation method seriously undermines the association’s ability to grow membership.

In this case, we recommended an approach that better represents the cost of serving members by conducting an incremental cost analysis, also known as marginal cost analysis. This method attributes only the variable costs incurred by adding a new member. With this approach, we define variable costs as changing directly with the number of members. The costs for a new member include welcome packs, printed materials, and mailing and distribution for magazines, newsletters, and renewal notices. On the other hand, we saw the fixed costs remaining constant for this organization when they added new members. These costs include staff wages and salaries, which do not increase directly with each new member. Likewise, costs for office space and utilities generally remain stable regardless of changes in membership numbers, along with general administrative expenses, such as IT infrastructure.

Based on these definitions, here is how we presented our analysis of this one association’s cost of serving its members. With the fixed cost formula, If they added 100 members, their projection showed they would have additional fixed expenses of $21,700 annually to serve these members using their $217 per member calculation. However, here is how we calculated the servicing cost for them using the incremental method for these additional 100 new members. We found that they would spend $500 for the additional printed materials and welcome packs and $1,500 for increased mailing and printing costs for their membership services over the year. So, the total incremental cost for 100 new members is $2,000, resulting in an incremental cost of $20 per new member.

With this understanding, calculating the new dues revenue minus the incremental cost to serve a member demonstrates how financially beneficial a new member would be to this association. Calculating the incremental cost to serve a trade association member adds complexity because of the likely increased customer service demands a company may require. However, even with these considerations, there will still only be a marginal increase to serve these members.

The other approach to calculating servicing costs is to define the “real” costs of serving a member. The challenge is that what those actual costs are is highly subjective. Should the servicing costs include some portion of the CEO’s salary? What about the editorial staff that works to publish the magazine for members? Should only the office space occupied by the membership department be assigned to the cost, or should some portion of 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 is the cost of insurance, software, and staff travel assigned?

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

Of course, over time, the incremental cost method poses some problems in a rapidly growing association. Additional staff will be required to serve members at some point, and if staff work on-site, office space might need to expand. However, I have witnessed clients growing membership by 30 percent and not adding staff or requiring additional space.

The bottom line is that for most associations, serving members is why the organization exists. In addition to dues revenue, most product purchases, registrations, exhibits, and advertising revenue are driven by the existence of members. So, understanding the costs of providing services to members must be factored into any economic calculation. However, following a simple incremental cost method will provide the fundamental information required and save considerable time and effort from establishing a more granular formula subject to potential daily change.