20 November 2012

What Is Cost to Serve?

And why does it matter?

Every membership organization faces this sooner or later, and the answer, while simple, is not easy.

At its most basic level:
Revenue per member – Expenses per member = Cost to serve a member 
Simple, right?
"If membership is $100 a year, and it costs us $60 a year to mail each member our journal, that's our cost to serve, and we bring in $40 a year in revenue per member. Go us!"

Not so fast, Sparky.
  • What do you mean by “member”? (Is it just people who pay full fare dues? What about consistent audiences like your corporate supporters?)
  • How much revenue does each member actually contribute to the organization? (Do they ALL pay $100?)
  • What does it cost to recruit and retain each member? (It's probably not $0.)
  • What's the FULL list services all members use? (It's probably more than just your journal.)
  • What services do only some members use?  (Hello, annual meeting.)
  • Which services are used by audiences outside the membership? (Website? Advocacy programs? People LOVE to free ride on that stuff.)
  • What do all services actually cost to provide, in both direct and indirect costs? (Oh noes! Staff costs!)
  • How are the revenues from those services really allocated? (What percentage goes to the board's current pet project?)
In order to remain financially healthy, membership organizations must know how much additional revenue or expense each member brings to the organization.

Knowing how much revenue each additional member brings helps an organization understand more clearly how much is reasonable to spend on member acquisition.

Knowing how much expense each additional member brings helps an organization understand how to price dues and make decisions about which programs, products, and services should – or should not – be revenue generating and, in the case of programs, products, and services that are consciously chosen to lose money, how those losses can be offset.

So: what DOES it cost to serve your members? The answer may not be what you think it is.

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