See that member over there? The girl who comes in all the time, buys a protein bar and never misses a monthly payment? Are you losing money on her? Right now you’re thinking, initiation fee, membership dues, pro shop purchases, positive customer experience, she’s a gold mine. Anecdotal evidence aside, if you can’t support your assessment with hard numbers then it may be time to really look at the Average Revenue per Member (ARPM) for your fitness business. And if you’re not careful, you could be calculating your revenue projections all wrong.
Crunch the Numbers
First let’s look at the formula. ARPM is calculated by taking total revenue in a given period and dividing it by the number of members in that same time period. Want to take it one step further by calculating the Lifetime Value (LTV) of a member? Simply multiply the average number of months for your members by the membership price.
There you have it. Two easy metrics that any owner can use to help operate the business and understand annual revenue. But, there is something missing there. Did you notice it? What about operating costs? What about Non Dues Revenue (NDR)? Ever heard of membership acquisition costs? All of these need to be accounted for in order to properly identify how much money you are actually making (or losing) on that girl coming in all the time and buying her protein bar.
This would be a good time to expand upon Non Dues Revenue. It’s important. Like filing-your-taxes-on-time important. As much as this is a hard industry metric to pin down exactly (most reports have it between 17% and 20%), you need to know your club’s number. Any and everything that is purchased outside of a membership agreement is NDR.
For big clubs this consists mostly of personal training and massage services. However, for the small operator or studio it will most likely be nutrition, apparel, registration, events, one-off classes and anything short of the marquee signs. Get creative and do what needs to be done to increase this number because a club can’t live on membership dues alone.
So, let me illustrate my point here with an easy-to-follow scenario. Here we go…
Judy walks into your fitness business on the first of the month and falls in love with the place. She joins on the spot for $100 down and $30 per month no questions asked. This happens, right? Anyway, she becomes a great client, comes 4 times per week and even makes periodic pro shop purchases. A year later you sit down and decide to calculate how Judy’s membership is about to help you buy a new treadmill. Start with the initiation fee ($100), add the monthly dues ($30 x 12 = $360) and tack on the 20% national average for NDR purchases ($72). Annual revenue from Judy = $532. Ok, so maybe not a treadmill, but a really nice set of Plyo-Boxes.
Now for the bad news, your fitness business had expenses last year. So, we subtract the customer acquisition cost (-$100), national average of 7.3% for membership-related operating costs ( $532 X 92.7% = -$493.16) and you get a total expense for Judy’s membership of $593.16.
A little simple math and we can see that a revenue of $532 minus expenses of $593.16 leaves your club with a -$61.16.
And we had such high hopes for Judy.
But Wait …
Don’t fire your team, close your doors and start a Kabbalah blog just yet. There is hope. For starters, member referrals are not factored into this scenario. If Judy brought in six friends who all joined then right there we find residual value that doesn’t show up in the numbers directly. Also, don’t forget about your Non Dues Revenue (NDR). That number could easily be more than the typical 20% industry standard placeholder that is often used. Special add-on classes, priority registration fees, pro shop enhancements and additional service offerings like stretching classes and monthly massage nights could all increase post membership sale revenue.
The key is to not rely on membership dues alone. Of course, there is also the expense side of the equation as well. Refining your marketing to bring down acquisition costs, negotiating with vendors for better price points of pro shop items and generally evaluating all operational aspects of your fitness business will contribute in the long run. However, it all starts with knowing your numbers. And, too many operators misunderstand the metrics to begin with.
It’s said that 80% of all small business fail within the first year of operations. The fitness industry is not immune to this statistic. It therefore, becomes imperative to differentiate your fitness business from the next and increase your profitability in an effort to survive those critical first few years. You can do this by providing a great customer experience, controlling costs and most importantly, understanding the revenue generated by each and every member you have.
One last thing, and this is tricky. As much as Judy is a dollar sign statistic, you need to treat her like she is the only member you have. People can tell when a fitness business sees them only as a revenue source, and that’s not a gym they’re going to want to visit again.