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): 

AUM

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:

  • a voluntary annual churn of 3%
  • an involuntary annual churn based on life tables

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):

  • 10%, the minimum WACC that could be applied to public companies. 
  • 20%, a WACC more adequate if you are private and shareholders require a liquidity premium (Some VC will ask 30%).

CLV LTV CLTV life insurance

CONCLUSION:

  •  You need a clear understanding of your CAC when you deal with millennials. Because with a $400 CAC, you could easily destroy value as the CLV with a 20% WACC is under $400 until 26 years old!

  • A low Recurring Margin (predatory pricing strategy) should lead to an increased cautiousness. With a 20% WACC requirement, you need to wait 38 years old and $78K of wealth to cover a $400 CAC:

Robo-advisor

  • A higher churn decreases the CLV and also requires an increased attention:

FREE spreadsheets for your own CLV calculations.