The Keys to a Profitable Membership Website
Membership website business models allow you to strategically plan your growth because they have built in recurring revenue. Repeated cash flow that is steady and predictable is business nirvana.
However, before you can build predictable cash flow and revenue, you need to know what the key performance indicators of a membership website are and how to accurately measure them.
Only by accurately measuring the key performance indicators of your membership website, can you establish averages that allow you to accurately project future revenues and manage growth.
If you are not measuring the key performance indicators that are vital to your membership website, you are in serious risk of operating at a loss. Which is not good. You can’t stay in business long if you are bleeding money.
I learned this the hard way. Around 2002, I was operating an affiliate program to promote my portfolio of membership websites. The program payout was set per join and volume was high. But, I had a very serious problem and didn’t know it at the time.
The problem was I was paying affiliates more than each member was actually worth. Because I didn’t know my numbers accurately, I made a bad call and paid too much money per signup. This high payout attracted affiliate promotion, but it was too much for me to profit. And so I was losing about $10 on every member referred by an affiliate.
Think about that for a minute. If I am getting 1000 signups a day from affiliates and losing $10 each, I am losing $10,000 every day!
Needless to say, I had to do a lot of restructuring of payouts to make these signups profitable. Naturally, this pissed off my affiliates. But I am in business to make money. It was absolutely crucial to change payouts based on accurate data to be profitable.
If you want to profit from your membership website for a long time, then you need to study your key performance indicators. If you aren’t sure what they are, keep reading. I will explain what you need to know to strategically grow your membership website and profit.
It all starts with member values.
How Much Are Your Members Really Worth?
Member value, sometimes referred to customer lifetime value, is the top dog stat when it comes to membership websites. The value of each member that signs up determines how much money you make. It is vital that you know what this is and how to calculate it.
More importantly, you need to constantly calculate your member value. It is not enough to figure it out once and continue as if it never changes. It always changes.
So, how do you calculate how much a member is worth? You need to know how long your members remain a paying subscriber. This is called member retention.
Every new billing cycle, you will have a number of members that you are unable to rebill, often referred to as churn. This is caused by two things – member cancellation and declined payments.
When you know how many members leave every billing cycle, you also know how many stay. That is the number we learn when we calculate member retention.
How to Calculate Member Retention
For illustration purposes, I will assume a monthly billing cycle for members. (Please note that all the data I provide below to work through these calculations are theoretical. Please don’t comment to argue about them.)
Member retention can be calculated as a percentage. You then use that percentage when calculating member values. The calculation is simple.
Using our monthly membership illustration, you divide the number of members you were able to bill a second month by the number that were new members the previous month.
For example, in June, you signed up 100 new members. In July, you had 15 cancel and 5 whose payments were declined. So you rebilled 80 successfully. That is an 80% retention rate from new join to first month rebills (80/100=80%).
But it doesn’t stop there. Come August, you need to know how many that were rebilled successfully in July also billed successfully in August.
Let’s say in August, you only had 10 cancellations of those original members, and another 5 payments that were declined. Of the 80 you were able to bill successfully in July, you could only bill 65 successfully in August. 65/80=.8125 or 81.25%.
You repeat this exercise for as long as you attempt to bill those members that originally joined in June.
Member retention percentages are a rolling average. Because you are signing up new members every month, you are always calculating a new second month retention, third month retention, etc.
Think of member retention like a pyramid:
At the bottom of the pyramid are your original members for any given month. Time moves up the pyramid and the number of successful rebills decreases due to member attrition through cancellations and declined transactions.
The more levels of your pyramid, the more each member is worth.
Sample Member Retention Calculation
Let’s go through a sample calculation based on some theoretical raw data. You must be able to pull the rebill data from your member management or transaction processing system in order to do this calculation. Our raw data look like this:
Each month’s percentage is calculated by dividing that month’s rebill count by the previous month’s rebill count. They are not divided into the original number of new members.
Next up: Monthly Revenue
Using average retention percentages, you can now calculate monthly revenue. All you need to do is add in a price. For our example, let’s use $24.99 and a consistent 100 joins per month.
The above screenshot shows the number of transactions per month from July 2014 through June 2015. You then multiply the total billed transactions by price and you have gross monthly revenue.
Notice the gray shaded areas. They are shaded because there were no transactions. August 2014 only shows new members and month 1 rebills because no other possible transactions exist.
Before we move on, let’s take a look at the power of recurring revenue on growth:
As you can see, revenue explodes upward for a solid 7-8 months before leveling off. The leveling off occurs because there is no growth in new members. If you add in even a 5% growth, you’ll see a longer growth curve.
How to Calculate Lifetime Member Value
Take a look at the above graph again. Notice how it levels off toward the end of the 12 month cycle? This is a quick way to estimate the member value. When you see your curve flatline, divide the revenue amount, in our case approximately $8600, by the number of new members, in our case 100. This gives you approximately $86 per member.
If you want to calculate lifetime member value accurately, you add up all the revenue generated by rebilling the first month’s new members and divide by the number of new members:
In the screenshot above, you calculate total lifetime revenue by adding all the green boxes together. Then divide that number by the 100 new members in that first month. Doing that math, we get $86.97. Notice how close this is to the guestimate of $86 we made above using the graph.
What All This Means for Your Membership Website
The topic of this article is key performance indicators for your membership website, but so far, we haven’t really discussed those. So let’s go over those now.
A key performance indicator (KPI) must be two things: measurable and key to achieving business objectives.
In the case of a membership website, a key business objective is to get new members to join. So, our first KPI that we need to measure is number of new members. This is easy to do and probably the most watched stat for membership site owners.
The other key business objective for a membership website is to keep your members paying for your product or service. That is readily measured by member retention. Remember, the two things that impact retention are cancellations and transaction declines. If you can keep them both low, you are going to have high retention rates.
Get these right, and you will succeed with your membership website.
Before I go, let’s look at the impact of these KPIs on membership website profits
One thing that I like to do even before I begin building my membership website is to study different scenarios of KPIs and price and see how it impacts revenue. I have developed an Excel spreadsheet where I can quickly change things like price, new member signups, new member growth, and retention rates to see their impact on revenue.
I want to show you a few scenarios of changing the KPIs on our example above. These changes, both good and bad, can drastically impact your bottom line.
Growth of new member signups
Keeping member retention percentages and price the same, but increasing new signups 10% month after month shows an increase of $xxxx.xx to gross revenue:
With 10% new member signup growth, you increase member values by $1.95 each. Annual revenue is $135,044.22, an increase of $52,002.45. This is possible as long as you maintain average member retention percentages.
Increased member retention:
Here, I’ve increased member retention percentages by 10% each month. This has a nice impact on member values and yearly income:
We see an increase of member value by $45.35 each. Total revenue is up by $27,180.73 to $110,222.50.
Increased member retention and new member growth
In this scenario, I’ve increased member retention percentages by 10% each month and new member signup growth at 10% month over month. As you can see, it has a substantial impact on member values and yearly income:
Because member retention doesn’t change, neither will your member values. However, you will see an increase in revenue to $172,698.48, a difference of $89,656.71.
The bottom line? Increase new member signups and member retention, you will see a huge increase in revenue.
Next week, I’m going to write about the critical success factors of membership websites and different ways you can attack them.