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Some Fintech startups are betting on the growing Assets Under Management (AUM) of millennials.
Among them, you will find robo-advisors, micro-saving applications and trading platforms for self-directed investors.
This idea is obviously seductive. However, we could ask ourselves what is the real value of a millennial with an upside potential? As the Customer Acquisition Cost (CAC) of robo-advisors is generally considered to be between $200 and $400, we expect a CLV above this threshold.
Otherwise, the company is probably destroying value, as the money model is not “scalable”: every additional customer costs more money than the future margins on the expected lifetime of the relationship.
How to calculate the CLV?
1. Estimate the average AUM while a client is ageing
According to various sources, we estimated the following AUM depending on the age of the customer (example=US):
2. Estimate the Recurring Margin
The Recurring Margin is equal to recurring revenues less recurring costs. Customer Acquisition Costs are considered as paid upfront. Thus:
Recurring Margin = EBIT + CAC
According to BCG, we observe a 23 bp EBIT margin (0.23% of the AUM) in Wealth Management and 48 bp of operating expenses.
With an average 20% share of acquisition costs, the recurring margin is estimated around 33 bp (=23bp+20%x48bp). Of course, if your acquisition costs represent 50–60% of your operating expenses, you need to adapt your calculation.
How to adapt your Recurring Margin to an aggressive growth strategy?
Robo-advisors could apply a very aggressive pricing strategy like 30 bp. In this condition, the expected Recurring Margin will be lower than the average of the Weath Management industry. Here, your CFO should be your best ally. He will extract your past revenues and costs, estimate the share of your Customer Acquisition Costs and check that your Recurring Margin is realistic.
But, as I calculated the CLV based on the 33 bp average of the industry, if you estimate your Recurring Margin to 10 bp, you need to divide my calculation by 3!
3. Calculate annual churns
We separated every annual churn between 2 elements:
As a consequence, the total churn increases with the age. An aged customer will have a higher financial assets. But this is partly compensated by a lower duration of the relationship:
To calculate your CLV properly, you will need to adjust your voluntary churn rate depending on your average customer relationship in years.
4. CLV depending on the expected return
The CLV is calculated using 2 different Weighted Average Cost of Capital (WACC):
CONCLUSION:
This content is provided by an external author without editing by Finextra. It expresses the views and opinions of the author.
Boris Bialek Vice President and Field CTO, Industry Solutions at MongoDB
11 December
Kathiravan Rajendran Associate Director of Marketing Operations at Macro Global
10 December
Barley Laing UK Managing Director at Melissa
Scott Dawson CEO at DECTA
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