I run a social interactive / 'dating' site which has now been running
for about one year. It has become profitable and the business model
works, however, now we are satisfied with the business model itself we
need to invest in an online  marketing plan that is based on a cost to
aqcuire a free member, against the project eventual income of that
free member if and when they upgrade to a paying member.

My main question is how do I ascertain the 'lifetime value' of a member? 

I keep monthly figures of new members, sales, etc etc currently work
on the following calculation in order to value the free signups made
that month:

Example:

March 2006



Expenditure				
				
Google Adwords			£151.73
3rd Party Video Services	£248.24
Nightclub rental (one-off)	£425.53
Hosting				£700.00
			
		   TOTAL      £1,525.50


Income			      £3,422.64

Profit	=		      £1,897.14


New free members that signed up that month were 2,140


So I work on the following calculation for each month in question:

Running costs of £1,525.50 divided by the number of new members that
month (2,140) = £0.71

Income of £3,422.64 divided by the number of new members that joined
that month (2,140) = £1.60

Therefore, profit of each new member that joins that month is £0.89

Naturally, the income didnt always come that month from a new member,
maybe some new members and exisiting members, but its the only way I
feel you can calculate things on a monthly basis.

I therefore deduce that the cost to acquire free members, via Google
Adwords, Banners, Co-Reg's etc should not rise above £0.71

I'm not sure if this is the best way to work. 

I a nutshell, I am trying to find a true calcualtion that allows me to
decide how much marketing money I should spend on acquiring a new
member, in other words, the maxium I would pay to get a free member,
and the likely profit from that.

I do have more information available if needed, and if you are able to
advise effecting co-registration programmes or guaranteed signups etc
/ or any other solid marketing information that other similar sites
are using, it would be most helpful!

Many thanks for your time.

Regards

Martin

<Calculating the worth of a member and maximum acquisition cost.

In order to find how much an average member is worth, you need to find
how long your members remain and the rate of conversion from free
member to paid member. With match.com for example they were able to
keep members for an average of five months. The average length of stay
multiplied by the subscription paid gives the gross worth of a member.

According to Match.com, subscribers remain members for an average of
five months. (Source: Caslon.)
http://www.caslon.com.au/socialspacesprofile1.htm

To calculate the average length of stay you need to add up how long
each paid member stays for and divide by the number of paid members.
Suppose you have 100 paid members
50 join for 2 months,
10 for 3 months,
5 for 4 months,
10 for 6 months,
20 for a year.

(50 x 2) + (10 x 3) + (5 x 4) + (10 x 6) + ( 20 x 12) = 450

450/100 = 4.5. Therefore each member stays for an average of 4.5 months.

Suppose the subsciption costs 30 per month. 4.5 x 30 = 135. A paid
member will be worth on average 135.

Suppose for every 100 free members, 5 became paying members. This
gives a conversion rate of 5%.

You therefore need to recruit 20 (100/5 = 20) free members to get one
paying member.

The cost of recruiting the one free member must be less than 135/20 =
6.75  in order to make a profit.

Suppose you decide to spend 20% of revenue on marketing. The maximum
that you spend on acquiring a member is 6.75 x 20% = 1.35

The formula used is
Maximum cost = Average revenue x conversion rate x percentage for marketing.

For the above example:
Average revenue = 135
Conversion rate = 5%
Marketing percentage = 20%

135 x 5% x 20% = 1.35

This principle is explained in the following article:
Budgeting for online success: calculating your maximum cost per
visitor. By Gord Hotchkiss.
http://www.searchengineposition.com/info/netprofit/maximumcost.asp

------------------------------------------
Getting better value from marketing.

Since the cost of retaining existing clients is much less than the
cost of recruiting new prospects, it makes sense to concentrate your
marketing efforts on existing clients. Someone who has already
expressed an interest in your service by signing up for a free trial
is much easier to convert to a paying member. Offering something for
free or a discount for signing up within a week can help to convert
them to paying members.

In order to optimise your marketing strategy you need to analyse your
figures in greater detail.

For example you need to know how many members are coming from the
various paid sources and how many you are getting for free. You many
find that you are recruiting members that cost you nothing in
marketing costs. They may find your site through a search engine or
may be referred by a friend.

For your paid marketing you need to assess the various sources and
find out which are performing best.

--------------------------------
What other dating sites spend on marketing


Matchnet generates average revenue of $75 per subscriber with an
average acquisition cost of $41.

In this case they spend 54.66% of their revenue on marketing.
(Source: Online Dating. Dave Evans. November 05, 2004. Corante.)
http://www.corante.com/dating/archives/2004/11/05/matchnet_3q_2004_results.php

Jdate  
Monthly Revenue $28.42
Acquisition cost $8.09 per member.

AmericanSingles.com 
Monthly revenue $22.16
Acquision cost $43.29 per member.
(Source: Online Dating. Dave Evans. March 18, 2005. Corante.)

http://www.corante.com/dating/archives/2005/03/18/payperclick_ad_inflation_victims.php

A more detailed analysis of these figures is given here.
In 2004, subscriber churn for Jdate was 25.8% and 35.6% for
AmericanSingles. (Source: The Internet Stock Blog.)
http://www.internetstockblog.com/2005/03/quotes_from_the.html


--------------------------------------------------
I have previously answered questions about the marketing campaigns of
dating sites. The two links below lead to the answers.

How other dating sites have acquired members.
http://answers.cbfl.net/answers/threadview?id=452781

Member acquisition campaign (new dating web site) ? strategy.
http://answers.cbfl.net/answers/threadview?id=400173>

---------------------------------------------------


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<Hope this helps.>