How to calculate resident lifetime value to find lost revenue, make strategic budgeting decisions, and set up your community for long-term financial success.
What is resident lifetime value and why is it important?
Resident lifetime value projects the total revenue prospective residents would bring to your community. It’s an important tool for analyzing how well you’re determining and utilizing your budget. Resident lifetime value assessments are also great for understanding the consumer’s perspective of your community’s value, especially in comparison to competitors.
There are many facets of your community that lifetime value calculations can be plugged into, particularly when analyzing your sales and marketing budget. Let’s get started with a quick analysis to see an example of lifetime value for an imagined senior living community.
How do you calculate lifetime value?
Start with your occupancy:
Occupancy is a quick measurement you likely already have on hand. You can use the same equation to quickly determine your rate of occupancy for both occupied and unoccupied units – which should always add up to 100%.
Number of Occupied Units ÷ Number of Available Units
Number of Unoccupied Units ÷ Number of Available Units
80 filled ÷ 100 available = 0.8 or 80% occupied (80 units), which = 20% unoccupied (20 units)
[100% – 80% occupied = 20% unoccupied, and vice versa]
Also consider your rate of attrition:
If you know your typical rate of attrition, you can also add that into the equation for consideration. For instance, if the previous community example were to typically have an annual turnover rate of 10 units per year, we could assume the occupancy for this community would stand at 70% occupied and 30% unoccupied by EOY. That means 30 units would need to be filled during the year to achieve 100% occupancy.
Input your fees:
Now that you’ve refreshed your occupancy rate, input your yearly and/or monthly costs into the unoccupied units to find lost revenue:
# of unoccupied units * Monthly rent and/or entrance fee
30 unoccupied units (current unoccupied + expected attrition) * $5,000 in monthly rent (per unit) = $150,000 lost revenue each month * 12 months = $1,800,000 lost revenue each year for the community
Now calculate the average length of stay to get your first look at a base lifetime value of a resident.
If you consider the average stay for a resident, and then input your costs, you’ll see how much total revenue you could gain over their entire length of stay:
Average # of months (typically around 2 years for AL/MC and 7 years for CCRC/Life Plan Community) * Entrance fee and/or monthly rent = Resident lifetime value
24 months stay * $5,000 monthly rent = $120,000 lifetime revenue per sale
Finally, calculate your total lost revenue.
Now you have a full look at occupancy, monthly and yearly fees per resident, and lifetime resident value.
Using the occupancy number shown above, you can get a fuller look at how much revenue our imagined community is missing out on over time by not filling the unoccupied units:
Total Lifetime Value Per Resident * # Unoccupied Units
$120,000 lifetime value * 30 unoccupied units = $3,600,000 in total lost revenue that could be generated by filling open units
(We can also see this is the same as our total lost revenue each year * average # of years per stay.)
Some other considerations:
Now that we’ve given you a basic view of lost revenue and resident lifetime value, we can’t forget to mention some other important factors that can add to total dollars.
Once a person becomes a resident of your community, there are many opportunities to add revenue over time by cross-selling and upselling to this resident.
Here are just a few of many factors that can contribute to value assessments in addition to base costs:
- Private room upgrades
- Floor plan variations
- Meal costs and extra dining options
- Percent of refundability
- Referral programs
- Activities of Daily Living (ADLs)
How does this help us analyze our marketing budget?
With real dollars assigned to the money left on the table, it’s easier to make strategic budgeting decisions and think long term about marketing expenses.
Your Marketing Is a Revenue Line and Each Sale Has YOY Impact
Looking at marketing costs as revenue generators rather than expense lines and backing into a scientific number rooted in potential revenue can prevent the backward-looking mentality that keeps you from reaching your financial potential.
If you hadn’t completed the simple exercise above, you might reactively think that 10k spent on marketing isn’t worth it when rent is only 5k a month. However, while you only had to make that sale one time, your resident is likely bringing in revenue for years to come. The one sale you made because you spent 10k in a month doesn’t just bring you 5k one time for a month;
it brings you the entire lifetime value of the resident.
For example, if you spend $10k/month on marketing that results in one move-in each month to our imagined community, you’ll spend $120,000 in a year. And that $120,000 will lead to $720,000 in additional revenue from those new move-ins.
Marketing Budget: $10,000 per month or $120,000 per year
Average Move-ins: 1/month or 12/year
Resident Lifetime Value: $120,000 * 12 move-ins = $720,000 additional revenue
Return on Marketing Investment: 6x
That’s 6x ROI, just for a 2-year stay. If you’re using marketing in a way that allows you to get even better-quality leads who convert at higher rates, you can stretch your marketing dollars even further in the pursuit of 100% occupancy.
What if instead of being satisfied with only 12 move-ins, you use marketing to reach 100% occupancy and have all 30 units filled? That’s $3,600,000 added from lost revenue.
As you’re looking toward the future, keep the lifetime value of residents in mind and root your budgeting decisions in real numbers and revenue projections. There is a science to long-term success, and it’s built around predictable occupancy that continues to benefit your bottom line long after you’ve made a sale.