Allowable Acquisition Cost

Allowable Acquisition Cost (AAC) is the marketing component of Lifetime Value of An Athlete. The higher the LVA, the more you can spend to attract new athletes. Recently, I read a facebook post that was discussing how much to spend on referral programs. One comment that struck me said something along the lines of “Why would you pay your current member $100 to get another athlete in the door?” The justification for that statement was that your revenue would take a hit the month you pay out the $100. In effect the respondent was saying you were going to lose $100 of revenue.

 

The reason is simple if you understand LVA.

 

Using our example above, if our referral program awards $100 to the current member to bring one of their friends in and the sign up, the AAC is $100/$1,130 or 8%. I would trade $100 every day to get $1,130 over the next 9 months. So that’s the simple part.

How to determine AAC

There’s a bunch of models out there, but here’s a simple one.
Take your overhead expenses(rent, insurance, utilities, salaries, etc) during the LVA divided by the number of athletes to find your Fixed Cost (FC) per athlete.
Here’s the quick math.

9 months of overhead costs you $50,000 and you have 100 athletes, your Fixed Cost per athlete is $500. As you grow, this number should decrease.

LVA – FC = Revenue before marketing expenses. In our example, $1,130 – $500 = $630. Now you need to determine what type of profit margin you want on that leftover $630, for this example lets shoot for 60%, which leaves you 40% for marketing expenses or $252. This $252 is the maximum you can spend to acquire a new customer. Having this number allows you to experiment with a variety of marketing options.

So putting those two pieces together, spending $100 per athlete on a referral program is a good investment. Plus there’s a potential snowball effect with your new athlete attracting their friends and family because of that bonus. IMO, it’s a win/win situation. It just provides a little bit of extra motivation for a current athlete to bring in a new athlete. Now they’re working out with all their friends…which boosts your retention. :)

As you increase your LVA, you’ll have more money to spend on AAC.

There are definitely other ways to spend your marketing dollars, so understanding your AAC is a great first step. Once they are in the door, keep them there. :)

Mike
Founder at TheBoxBusiness
CF-L1 Trainer. Owner of CrossFit COMO in Columbia, MO. Founder of TheBoxBusiness.com. Former College Professor.

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