Think About What Each Customer Means To You
Individually, unless you have a specialized studio that caters to an elite clientele, each customer is just a marginal element of your monthly revenue. Not that you should ever think of them that way literally. Instead, you should look at the big picture: The total value of a customer is quantifiable, and once you’ve measured it, you can systematically improve it.
Who cares about lifetime value?
If you own a gym, or you manage the operations of a small gym for someone else, you need to care about such things. Customer lifetime value (CLV) is a metric that does what its name implies: it tells you about the lifetime value of each customer in a way that enables you to model of your business and improve it in the real world.
Calculating Your Gym’s Customer Lifetime Value
So, without getting into calculus or other advanced mathematics the simplified formula for lifetime value is as follows:
- CLV is the customer lifetime value that we are attempting to discover
- GC is the gross yearly contribution from each customer
- The variable "r" is your retention rate
- And "d" is the annual discount rate
The gross yearly contribution – So how much do you earn from each member on average? There are a few ways to tackle this one. The simplest would be to take your adjusted gross revenue for the year and divide it by the average number of members during the year.
Finding your retention rate – I covered this in a recent post that you can find here. In that post, I wrote about retention on a monthly basis. Here it needs to be annualized to line up with the other variables. The annual member retention rate equals the total number of members at the start of the year minus members added, divided by the total number of members at the end of the year.
OK, so what’s this discount rate… thing? – A discount rate is a factor that compensates for the fact that a dollar at some time in the future is worth less than a dollar now. The discount rate just makes it a constant rate of change. Think of it as an interest rate. In fact, an applicable discount rate might be the current lending rates or the rate at which your bank would expect you to pay for a line of credit equal to a year’s worth of income.
First, let’s find your retention rate:
- Assuming 250 members at the start of the year
- You added 40 members
- And 258 members at the end of the year
Retention rate r = (250 – 40)/258 = 0.814
Now to find the CLV:
- Say that gross yearly contribution per member (GC) is $400.00
- Let’s make the discount rate 10%, which is like saying a dollar at the end of the year is worth 90 cents now
CLV = 0.814/(1 + 0.1 – 0.814) = $1138.42
The above example gives you a rule-of-thumb, approximating a much more elaborate and subtle equation that’s the sum of an arithmetic series. It does, however, set a benchmark for improving the performance of your enterprise.
The discount rate is the least interesting part of this, and I would recommend that you choose it carefully and leave it in place once selected. It’s the GC and the retention rates that you can do the most to grow your business.
Two Strategies To Increase Your CLV
Improve the GC by boosting the average revenue per member. Your gross margin is the percentage of your income that is available for overheads and profits. Increasing this number will raise your gross contribution per member and make a proportionate improvement on your customer lifetime value.
Work on improving the retention rate for your membership. In the example, thirty-two members quit during the year. That has to be a red flag and an opportunity to make your service better.
There are entire economics and marketing textbooks devoted to creating equations that model the metrics of business, such as customer lifetime value and membership retention. The important thing for small gym business owners is to pay attention, measure outcomes and use them to improve the business in the same spirit that you would apply to the art of building fitness itself.
Contributors, Wikipedia. Customer Lifetime Value. February 12, 2016. https://en.wikipedia.org/w/index.php?title=Customer_lifetime_value&oldid=704615273 (accessed March 29, 2016).
Fagan, Lawrence. Finding Your Retention Rate and Why It Matters. March 22, 2016. https://blog.gyminsight.com/3741-finding-your-retention-rate-and-why-it-matters/ (accessed March 29, 2016).
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