Exploring the Impact of Advertising on Active Members

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As we’ve seen in previous lessons, to increase the level of Active Members over time, the Joining rate must exceed the Leaving rate.

  • To increase the Joining rate, you must increase the rate at which new members join because of advertising or from word of mouth.
  • To increase the rate at which new members join because of advertising, you must either increase your Advertising Budget or find ways to reduce your Customer Acquisition Cost (“CAC”).

Buying more advertising is straightforward and easy. Figuring out how to improve the effectiveness of your advertising—crafting a compelling value proposition, for example—is hard. However, both are potential points of leverage. Visual modeling helps us see points of leverage that we might otherwise neglect.

In this lesson, we’ll do the following:

  • Assign numerical values to the Advertising Budget and CAC variables to see what happens to the level of Active Members over time.
  • Create a dashboard to allow us to more easily change the values of the variables.

Reflection Questions

  • How might you estimate your Customer Acquisition Cost?
  • At what point might advertising expenditures experience diminishing returns? In other words, is the relationship between New Members from Advertising and the Advertising Budget always linear?